If large companies pay more, and if the average size of companies has grown sharply over time, average compensation would also grow, even if the value of the increasingly generous granting of stock options and equity shares were fully understood by stock markets and boards of directors.
The allocation of better managers to larger firms, and competition for these managers among companies of different sizes, means that companies in, say, 2006 would have to pay more for their CEOS than even the same sized companies did in 1980, although much less than six times as much. The reasoning is that the 2006 companies of a given size are competing against relatively larger companies than comparable size companies did in 1980.
Since average firm size is much lower elsewhere, their pay would be more like that of pay in the US in 1980 or 1990 than the pay of CEOS in today's much larger American firms. As the market for top executives becomes increasingly global, the pay of CEOS in other countries would rise, and that of CEOS in America might fall. For example, to attract Carlos Ghosn, a Brazilian working in France, to turn around Nissan, a seriously ailing company, Nissan had to pay him not at the low Japanese CEO levels, but at the much higher levels found in other countries. I believe that the explanation based on the allocation of CEO talent largely is behind the explosion in compensation of American CEOS during the past several decades.
Yet at the same time, some American CEOS are obviously grossly overpaid since they have mismanaged their companies, and still receive exorbitant compensations. But mismanagement is not new and probably has not become so much more important over time. So I am suggesting that the rapid growth of compensation of American CEOS, and its premium over compensation of CEOS in other countries, is not mainly due to a growth in the degree of excess payment of executives in the United States.
