Question

“Any theory of executive compensation must be able to consistently explain two stylized facts – the increase in executive compensation that has occurred relative to average pay, and the higher executive compensation in the United States relative to that in other countries.” Discuss.

Answer 1

Stylized facts are based on empirical findings of studies conducted for a long period of time. It establishes the consistency in different facts related to the executive compensation that there is a higher increase in executive compensation with respect to the rise in average pay and there is a higher increase in executive compensation in USA than that of any other country. It happens, because USA is the land of freedom, innovation and market based economy. Hence, executives driving their firm to achieve more success, take a bigger rise in compensation than that of other countries where the technology is transferred from the USA. Further, executives take more risk, attain bigger responsibilities and more prone to lose their jobs, hence reward for them is also bigger. It is the reason that increase in executive compensation is bigger than the increase in average pay. These facts are in line with the theories of executive compensation that focus upon the power, influence and authority asserted by the executives in pay related decisions. It makes theories of executive compensation, to be aligned with the stylized facts related to rise in executive compensation over a period of time.