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Finance and Economics Discussion Series: 2007-35 Screen Reader version ^♣

Executive Compensation:
A New View from a Long-Term Perspective, 1936-2005

Carola Frydman* and Raven E. Saks**

July 6, 2007

Keywords: Migration, business cycles

Abstract:

We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large firms from 1936 to 2005. In sharp contrast to the well-known steep upward trajectory of pay of the past 30 years, the median real value of compensation was remarkably flat from the late 1940s to the mid-1970s, highlighting a weak relationship between compensation and aggregate firm size. While this correlation has changed considerably over the century, the cross-sectional relationship between pay and firm size has remained stable. Another surprising finding is that the sensitivity of changes in an executive's wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Overall, these trends pose a challenge to several common explanations for the recent surge in executive pay.

1. Introduction

The compensation paid to CEOs of large publicly-traded corporations rose dramatically during the 1980s and 1990s, stimulating much debate on the determinants of managerial pay (Murphy 1999, Hall and Murphy 2003). The discussion has been largely inconclusive, due partly to the short time span of available data. By setting forth the trends in the level and composition of executive pay over most of the twentieth century, this paper provides new insight into three popular explanations for the recent surge in compensation: managerial rent-seeking, a competitive labor market for executives, and increases in managerial incentives.

Although prior studies have reported information on managerial pay for earlier time periods, these data cannot provide a consistent description of the long-run evolution of executive compensation because they are based on short sample periods with different sample designs and employ different methodologies to value the components of pay.¹ Instead, we document these trends by constructing a comprehensive panel dataset on the compensation of individual executives that extends from 1936 to 2005. We hand-collected this information from the proxy statements and 10-K reports of publicly-held firms, which have been required to disclose the remuneration of their top officers ever since the Securities and Exchange Commission (SEC) was established in 1934. Although our sample is mainly composed of executives employed in the largest corporations in the economy, our results are broadly characteristic of the largest 300 publicly-traded firms.

Consistent with previous studies, we find that executive pay increased moderately during the mid-1970s and rose at a faster rate in the subsequent two decades, reaching an average growth rate of more than 10 percent per year from 1995 to 1999. This acceleration represents a marked departure from the trend in compensation in the past. Following a sharp decline in the real value of pay during World War II, the level of executive compensation exhibited little change during the following 30 years, rising at a sluggish rate of 0.8 percent per year. The remarkable stability in the level of executive compensation from the end of World War II to the mid-1970s is surprising in light of the robust economic activity and considerable growth of firms during most of this period. Several studies have documented a strong correlation between executive compensation and the aggregate market value of firms in recent decades (Hall and Murphy 2003, Jensen and Murphy 2004, Gabaix and Landier 2007). This correlation is present in our data as well for recent years, but it was much smaller prior to the mid-1970s.

Another surprising finding in our data is that stock option grants have been an important part of the compensation package since the 1950s. Even though the value of option grants was low prior to the 1980s, executives have owned a substantial number of stock options for the past 50 years. Using a measure of an executive's firm-related wealth that includes changes in the value of his holdings of stock and stock options, we calculate consistent measures of the correlation between wealth and firm performance (often called "pay-to-performance") over the past 70 years. Similar to prior research, we find that this relationship strengthened considerably from the 1980s to the present (Hall and Liebman 1998, Murphy 1999). However, this increase was not part of a long-run upward trend. The sensitivity of changes in wealth to firm performance was about the same in the 1930s, 1950s and 1960s as it was in the 1980s, but somewhat lower in the 1940s and 1970s. Although the strength of the incentives provided by these correlations is difficult to assess, we come to a similar conclusion as Hall and Liebman that the magnitude of the correlation for most of our sample was not inconsequentially small. Thus, recent decades were not the first period in which compensation arrangements generated a strong link between the executives' wealth and firm value.

Although a comprehensive analysis of the causes of these trends is beyond the scope of the present paper, the long-run data provide new evidence to evaluate some of the major hypotheses for the recent surge in executive compensation. First, the run-up in CEO pay and expanded use of stock options have been linked to managers' ability to extract rents from the firm (Bebchuk and Fried 2003, Bebchuk and Fried 2004, Kuhnen and Zwiebel 2007). However, both the level of pay and the use of options were lower from the 1950s to the 1970s than in more recent years, even though corporate governance was arguably weaker in the earlier period. Thus, this explanation does not seem to fit well with the changes in executive pay over time.

A second set of explanations relate executive pay to changes in firm size. High levels of pay may be the result of firms' competition for scarce managerial talent (Lucas 1978, Rosen 1981, Rosen 1982, Tervio 2007), leading to higher compensation in larger firms. Consistent with this prediction, the cross-sectional correlation between the level of pay and a firm's position in the distribution of firm size was about 0.3 for most of our sample period. Extensions of this theory also predict that compensation should rise along with increases in the size of the typical firm in the market (Gabaix and Landier 2007). However, we find that shifts in the distribution of firms' market values over time were only weakly correlated with compensation prior to the mid-1970s, casting doubt on the validity of this theory for earlier time periods. In addition, the appearance of a strong correlation in more recent decades may be spurious, suggesting that this model may not even explain the post-1970 run-up in executive pay.

Another explanation is that the recent high level of pay could be the result of compensating executives for the risk generated by the greater use of incentive pay since the 1980s.² However, we find a considerable sensitivity of managerial wealth to firm performance in the 1950s and 1960s and much weaker incentives in the 1970s without notable changes in the level of pay. Thus, changes in pay-to-performance were not always accompanied by changes in the level of compensation.

It seems unlikely that these explanations can account for the long-run trends that we document in this paper, suggesting that the major determinants of pay may have changed over time. It is possible that the labor market for corporate executives operated differently in the past. Other factors, such as improvements in board monitoring and changes in social norms, may also have altered compensation arrangements. Thus, further studies of executive compensation should address these long-run trends to improve our understanding of how the determinants of pay have evolved over time.

2. Executive compensation data

Most empirical research on executive compensation has focused on the period after 1992 because data on managerial pay since that date are easily available in Compustat's Executive Compensation database (ExecuComp). The sources of these data are the proxy statements of publicly-held corporations, which report the remuneration of the firm's highest-paid officers. Although ExecuComp does not start until 1992, the SEC has had similar disclosure requirements since its inception in the 1930s.³ Thus, we construct a long-run panel dataset on executive compensation by hand-collecting data for the years 1936 to 1991 from historical proxy statements and 10-K reports, and using ExecuComp from 1992 to 2005.⁴ Because disclosure requirements have not changed significantly over time, firms' corporate reports provide a valuable resource for tracking pay in a consistent manner over the longer run.⁵ These data are particularly important for constructing consistent measures of stock option use, because options were valued differently in research conducted prior to the 1970s than the common practice today.

To construct our dataset, we select the largest 50 publicly-traded corporations in 1940, 1960 and 1990. We identify the largest firms in 1960 and 1990 by ranking corporations in Standard & Poor's Compustat database according to their total value of sales. Compustat's data do not extend back to 1940, so for that year we rank firms in the Center for Research in Security Prices (CRSP) database according to their market value. Because some firms appear among the largest 50 in more than one year, our dataset covers a total of 101 companies. For each firm, we collect annual data on the pay of the top officers for as many years as our sources allow. When a firm in our sample merges with a firm outside of the sample, we continue to follow the executives in the merged firm if the new firm retains the same name or if the industrial classification of the new firm does not change (see Appendix Section 1.1 for details). The resulting dataset is an unbalanced panel as companies enter and leave the sample over time.⁶

About 75 percent of the firms in our sample are in manufacturing industries, but our dataset also contains communications, public utilities, and retail companies. Appendix Table A1 lists all of the firms in our sample and Appendix Table A2 shows the distribution of firms by 2-digit SIC code.

Because our dataset includes firms that were large at different points in time, it captures some of the structural changes that were experienced by the economy over this 70-year period. Although this sample is not representative of the economy as a whole, it comprises at least 20 percent of the market value of the S&P 500 in every decade, and more than 40 percent prior to 1970 (see Appendix Table A3). Because the sample includes all of the available years for each of the selected firms, it reflects a broader segment of the economy than the largest 50 publicly-traded firms alone. We discuss the representativeness of our sample in Appendix Section 3, and conclude that it is representative of the largest 300 publicly-traded corporations. On the other hand, the sample does not reflect the compensation practices of smaller or private firms.

Table 1 reports basic descriptive statistics of our main sample, which includes the three highest-paid officers in each firm.⁷ There are more than 15,800 executive-year observations between the years 1936 to 2005, for a total of 2,862 individuals. The job titles held by the executives in our sample suggest that these officers were the main decision-makers in the firm (see Table 2). More than 47 percent of these managers held the title "CEO," "president," or "chairman of the board."⁸ Furthermore, more than 80 percent of these officers also served on the board of directors.

3. Long-Run Trends in Compensation

3.1 Trends in total compensation

Figure 1 shows the median real value of total compensation from 1936 to 2005.⁹ We define total compensation as the sum of salaries, bonuses, long-term incentive payments, and the Black-Scholes value of stock option grants. The figure reveals three distinct phases that form a J-shaped pattern over the course of our sample period. During the first 15 years, the real value of compensation fell from about $0.9 million to $0.75 million. Although more pronounced during World War II, the decline in executive pay continued from the end of the war until the early 1950s. This period of deterioration was followed by 25 years of slow growth, averaging 0.8 percent per year from 1950 to 1975. Finally, the level of executive pay has climbed at an increasing rate since the mid-1970s. Although compensation dipped briefly from 2001 to 2003, it resumed a rapid rate of growth during the last two years of our sample. Thus, the rapid increase in pay in the 1990s did not end with the collapse of the stock market boom in 2000.

More than 95 percent of the individuals in our sample fall above the 99.9^th percentile of the national distribution of wage and salary income documented by Piketty and Saez (2003). Therefore, a comparison of executive pay to the earnings of a typical worker provides insight into the evolution of earnings inequality at the top of the income distribution. We calculate relative executive pay by dividing median compensation in our sample by average earnings per full-time equivalent worker from the National Income and Product Accounts.

This measure of earnings inequality follows an even-more pronounced J-shaped pattern over our sample period than the dollar value of executive pay (see the dashed line in Figure 1). The real value of average earnings in the economy increased during the early years of our sample even as the level of executive pay declined, leading to a sharp contraction in the gap between these two groups from 1940 to 1944. Relative executive pay declined further until 1970, at which point executive earnings began to rise faster than those of the average worker. By 1990, relative executive pay had recovered its Depression-era level. The gap between executives and workers expanded even further during the most recent 15 years, and by 2005 the median executive in our sample earned 110 times average worker earnings--about twice the corresponding ratio prior to World War II. Despite differences in the underlying source data between our sample and the income tax records used by Piketty and Saez to calculate wage and income shares, the trend in relative executive pay is similar to the share of the top 0.1 percent of the national distribution of wage and salary income.¹⁰

3.2 The structure of executive compensation

Figure 2 decomposes the real value of total compensation into its three main components. The short dashed line shows the median value of salaries plus any bonus that was both awarded and paid out within the same year, which we refer to as a current bonus.¹¹ These bonuses were generally paid in cash, but some were also paid in company stock. The long-dashed line adds the amount paid to each executive as part of a deferred bonus or long-term incentive payment.¹² The solid line, which replicates the real value of total compensation shown in Figure 1, adds the Black-Scholes value of stock option grants.

During the first twenty years of our sample, compensation was composed mainly of salaries and current bonuses. Although long-term bonuses were awarded to some executives as early as the 1940s, they were not common enough to make a noticeable impact on median pay until the 1960s.¹³ These long-term bonuses were usually based on the firm's profits or net income, with payment in cash or stock distributed in equal installments over a certain number of years.¹⁴ These bonuses became a greater share of compensation over time, reaching more than 35 percent of total pay by 2005.

Stock option grants have also become a larger fraction of compensation over the course of our sample period. Among executives receiving an option award, the median value of grants fluctuated between 15 and 30 percent of total compensation from the mid-1950s to the mid-1980s. The upper end of this range is not much less than the median value of 37 percent during the option boom of the late 1990s, suggesting that options have been an important component of executive pay since mid-century.¹⁵

Because the value of an option award relative to the total pay of those executives being granted options has not risen greatly over time, the increasing importance of stock options relative to median total compensation is largely due to an upward trend in the frequency of grants. The use of employee stock options was almost negligible during the 1930s and 1940s. In 1950, tax reform legislation introduced the restricted stock option, a special type of option that was taxed as a capital gain instead of as labor income. Consequently, executives paid a marginal tax rate on these options of only 25 percent instead of the 70 to 90 percent marginal rate they faced on labor income. More than 40 percent of the firms in our sample instituted a restricted stock option plan in the 5 years following this reform, suggesting that this tax policy had a significant impact on executive pay.

Despite the proliferation of restricted stock option plans during this period, the awards made under these plans were sporadic at first. Throughout the 1950s, only about 16 percent of the executives in our sample were awarded an option in any given year. The frequency of stock option grants has increased steadily since then. By the 1990s, the fraction of executives receiving an option had reached 82 percent (see Figure 3).

Prior research on executive pay has found more infrequent option use during the 1970s and the early 1980s than we find in our sample (Hall and Liebman 1998, Jensen and Murphy 2004, and Murphy 1999).¹⁶ The difference between our results and prior research can be partly explained by firm size. Our sample is more heavily weighted towards large firms than other samples, and large firms tend to grant options more frequently. However, several measurement issues are also important in explaining these discrepancies. First, prior work on option use in the 1970s has relied on data on the gains from exercising options rather than direct evidence on option grants. In our data, the probability of being granted an option during the 1970s was 16 percentage points higher than the probability of exercising an option, possibly due to poor stock market performance during this period.¹⁷ The high frequency of stock option grants in our sample is also related to the treatment of multi-year reporting of options. Many proxy statements issued from the late 1960s to the late 1980s reported option grants and exercises as 3- or 5-year cumulative totals, making it difficult to ascertain the actual number granted or exercised in each year. While our treatment of multi-year reporting biases the frequency of grants upwards, the average and median values of options granted are unbiased. See Sections 2.2 and 3.2 of the Appendix for further details.

3.3 Other forms of compensation

Our analysis does not include information on two other components of pay: pensions and perquisites. Although proxy statements provide descriptions of pension plans, we are unable to estimate the value of these benefits because many plans were based on an age-tenure profile of the managers and we lack this information on most of the managers in our sample. We exclude perquisites because firms were not required to report any information on this type of pay until the late 1970s.¹⁸

The omission of pensions and perks may bias our estimate of the trend in total compensation because they are not subject to personal income taxes at the time they are awarded, so these methods of pay may have been more common in the 1950s and 1960s when tax rates were particularly high. Thus, the growth rate in total pay (including both observed and unobserved forms of compensation) may have been faster during these earlier decades than in later years when the tax advantage of pensions, perks, and other non-taxable benefits was smaller.

On the other hand, evidence from Lewellen (1968) suggests that pensions cannot account for the low rate of growth in executive compensation observed during the 1950s and 1960s. He reports that the after-tax value of retirement benefits was 15 percent of after-tax total pay from 1950 to 1963. Because pensions were taxed at a lower rate than cash compensation, the pre-tax value of pensions relative to total pay was even lower than 15 percent. By contrast, Sundaram and Yermack (2006) find increases in the actuarial value of pensions to be about 10 percent of total CEO pay from 1996 to 2002, and Bebchuk and Jackson (2005) report a ratio of executives' retirement benefits to total pay received during their entire service as CEO of about 34 percent in 2004. Thus, pensions do not appear to have been a larger fraction of total compensation in the 1950s or 1960s than they are today.

Furthermore, the following back-of-the-envelope calculation suggests that the combined value of pensions, perquisites and other untaxed benefits would need to have been implausibly large to explain the low growth rate of pay during the 1950s and 1960s. For the observable types of compensation in our dataset, median pay increased from $0.74 million in 1950 to $0.82 million in 1970, an annual average growth rate of 0.5 percent. By contrast, median pay increased by a factor of 4.4 from 1980 to 2000. If we assume that the value of unobserved forms of pay was zero in 1950, these unobserved benefits would need to have amounted to $2.4 million in 1970 in order to achieve a rate of increase in total compensation similar to the 1980 to 2000 period ($0.74*4.4-$0.82=$2.4 million). This amount is almost three times higher than the median level of salaries, bonuses and stock options at that time and strikes us as implausibly large. Moreover, this number underestimates the necessary value of non-taxable benefits in 1970 if the actual level of unobserved benefits was greater than zero in 1950. Thus, while pensions and perks may partly explain the slow growth rate of pay documented during the 1950s and 1960s, it is doubtful that including these benefits would alter our finding of a much lower rate of increase in total pay during this period relative to later decades.

3.4 Differences among executives

Table 3 shows total compensation at the 10^th, 25^th, 50^th, 75^th and 90^th percentiles of our sample. The general pattern over time is similar across all groups, with relatively slow growth from the 1950s to the 1970s followed by large increases in the past 25 years. In contrast, the decline in real pay that occurred during the 1940s was experienced only by executives at the higher end of the distribution. Thus, this sharp contraction in the income distribution of executives suggests that the "Great Compression" (Goldin and Margo 1992) occurred even among some of the highest-paid individuals in the nation.

Increases in compensation during the last 20 years of our sample were more pronounced for higher-paid executives. Whereas the ratio of pay at the 90^th to the 50^th percentile fluctuated between 1.8 and 2.4 from 1936 to 1986, by 2005 this gap had risen to more than 3.5. This widening inequality among managers is also reflected in the average level of executive pay (see Table 3), which is more influenced by large outliers than the median. The difference between mean and median compensation was relatively small and stable prior to the 1980s, but grew substantially since then. In the 2000-2005 period, the average executive in our sample earned nearly twice the remuneration of the median officer.

The fanning out of the distribution in executive pay has coincided with an increase in the return to holding the title of "CEO." The median ratio of a CEO's total compensation relative to the average pay of the other two highest-paid officers in his firm was 2.6 in the 2000-2005 period, a marked increase from the relatively steady ratio of 1.4 that prevailed prior to 1980 (see Table 3).¹⁹ Nevertheless, increases in level of pay for non-CEOs were also substantial. Therefore, the patterns documented in this paper are not specific to CEOs, but characterize the remuneration of top management more generally.

3.5 Representativeness of the sample

Although the trends in pay are roughly similar for all of the executives in our sample, it is not clear how well they reflect more general patterns in the compensation of top officers in the economy. For one reason, the individuals in our sample were employed mainly in the largest publicly-traded firms, where pay tends to be higher (Roberts 1956, Kostiuk 1990, Rosen 1992). Thus, our data do not necessarily reflect remuneration practices in smaller firms. An added consideration is how to interpret our data at points in time that are not close to 1940, 1960, or 1990--the years in which the firms in our sample were selected to be among the largest in the economy. We evaluate the representativeness of our sample in Appendix Section 3, and highlight the main results of that analysis here.

A simple graph of median pay in firms of different sizes shows that the trends in total pay are similar in both the larger and smaller firms in our sample (see Figure 4). Managers of larger firms were paid more, but compensation increased markedly in all firm-size categories during the last 25 years. Similarly, compensation stagnated from 1950 to 1980 in firms of all sizes in our sample. In Appendix Section 3.1 we evaluate the representativeness of salaries and bonuses in our sample from 1970 to 2005 by comparing them to pay in similar-sized firms from other larger datasets. Our data are similar to the other samples for firms that are among the largest 300 in the economy, suggesting that salaries and bonuses in our sample are representative of this group. We also evaluate the representativeness of our data over our entire sample period by assigning a weight to each firm that is inversely proportional to its probability of being selected among the 500 largest publicly-held firms in each year. The unweighted median level of pay in our entire sample closely matches the weighted median of the largest 300 firms in the economy.

In addition to offering a higher level of pay, large firms may also structure the compensation package differently. Somewhat surprisingly, we do not find a strong correlation between firm size and the share of stock options in total pay. Hall and Liebman (1998) find a stronger positive relationship between option use and firm size in a sample that is more representative of publicly-traded firms in the S&P 500 from 1980 to 1994. We attribute this discrepancy to the fact that the smaller firms in our sample are only included if they were large earlier on, if they will grow larger later in the sample, or if they are experiencing a temporary negative shock. Therefore, the structure of pay in these firms may not be representative of the typical small firm in the economy. In Appendix Section 3.3, we use the relationship between option grants and firm size in the Hall-Liebman data to correct the level of total pay for the firms in our sample. This exercise has little effect on the median level of total compensation in our data and does not alter our conclusions about the long-run evolution of executive pay.

3.6 Interpreting the trends in the level of pay

It is doubtful that any single factor can explain the long-run trends in executive compensation, and an analysis of all of the potential determinants of pay is beyond the scope of this paper. Nevertheless, a long-run perspective adds new evidence against which to examine some of the proposed explanations for the recent growth in compensation. We discuss some of these theories below and investigate two in greater detail in the remaining sections of the paper.

Outsized increases in the level of total pay and stock option grants in recent decades have often been related to managers' ability to extract rents (Bebchuk and Fried 2004). However, the long-run trends in pay seem inconsistent with this theory because both external and internal corporate governance mechanisms were most likely weaker earlier in the century (Jensen 1993, Holmstrom 2005). Among the firms in our sample, the median fraction of the board of directors occupied by officers of the firm fell from 0.42 in 1950 to 0.18 in 1990.²⁰ More generally, proxy fights and takeovers were rare prior to the 1980s (Holmstrom and Kaplan 2001), boards of directors have become smaller and more independent since mid-century (Lehn, Patro, and Zaho 2003), and both the ownership of institutional shareholders and shareholder activism have increased since the 1950s (Khurana 2002, Gillian and Starks 2007). These aspects of corporate governance are not comprehensive, nor do they rule out a positive effect of poor corporate governance on compensation, but nevertheless they suggest that the ability of executives to set their own pay may have diminished over time.²¹ On the other hand, improvements in board diligence over time may actually have contributed to the upward trend in executive pay (Hermalin 2005).

A second proposed explanation for recent increases in executive pay is related to managerial talent and the labor market for executives. Theories of the span of control (Lucas 1978, Rosen 1982, Rosen 1992), superstars (Rosen 1981), and competitive assignment of CEOs to heterogeneous firms (Tervio 2007, Gabaix and Landier 2007) predict a positive correlation in the cross-section between firm size and compensation. In fact, a vast number of studies have documented that CEO pay tends to be 0.3 percent higher in firms that are 1 percent larger (Rosen 1992). Moreover, extensions of these models propose that the variation in compensation over time is related to aggregate firm size (Gabaix and Landier 2007). This framework seems promising because recent decades have experienced large increases in both the level of pay and the value of publicly-traded firms (Hall and Murphy 2003, Bebchuk and Grinstein 2005, Gabaix and Landier 2007). However, the long-run trends are inconsistent with this hypothesis, as the relationship between compensation and the market value of firms has not always been as strong as it was in the past 25 years. Aggregate market capitalization (measured by the S&P 500 index) increased considerably during the 1950s and 1960s, but the level of pay experienced little change (see Figure 5).²² In Section 4 we present further evidence on the link between executive compensation and firm size in order to better assess the role that this connection may have in explaining the long-run evolution of managerial pay.

A third proposal relates the upward trend in compensation to the rising use of incentive pay since the 1980s, as higher remuneration may be necessary to compensate executives for a riskier stream of income. Among other problems, this hypothesis has been difficult to assess because consistent estimates of the correlation between pay and performance are only available since to the 1980s, a period of simultaneous increases in the level of pay and in pay-to-performance. We return to this issue in Section 5 by calculating consistent measures of pay-to-performance that span the past 70 years.

4. The relationship between the level of executive pay and firm size

4.1 Decomposition of the correlation between total compensation and firm size

To better understand the relationship between firm size and the level of pay, Table 4 fully decomposes this correlation into three main components: average firm size in each year (reflecting the size of a typical firm in the market), average size of each firm across all years (reflecting firm-specific factors), and the difference of firm size in each year from these year-specific and firm-specific averages (reflecting transitory changes in firm size that are unrelated to market fluctuations). We estimate the correlation between each of these factors and the compensation of each executive in our sample from the following OLS regression:

$$Ln(Compensation_{{ijt} })=\beta _{0 }+\beta _{1 }Ln(\overline {S_{t }} )+\beta _{2 }Ln(\overline {S_{j }} )+\beta _{3 }\left[ {Ln(S_{{jt} })-Ln(\overline {S_{t })} -Ln\overline {(S_{j }} )} \right]+\varepsilon _{{ijt} }{\begin{array}{*{20}c} \hfill \ \end{array} }[1]$$

where is firm 's size in year , is the average size across all firms in our sample in year , and is the average size of firm across all years. We measure firm size using the firm's market value and break the sample into two periods in order to examine how these correlations have changed over time.²³

Firm-specific and idiosyncratic components of firm size had a positive and significant effect on compensation over the entire sample period (the coefficients were both around 0.2 to 0.3, and did not vary noticeably across periods). However, the role of aggregate market value has changed markedly over time. During the second half of our sample, the relationship between executive pay and the average market value of firms was roughly 1-for-1 (col. 3).²⁴ However, we estimate a much smaller coefficient of 0.1 in the first 40 years of our sample (col. 1). This result cannot be explained by unusual factors related to the Depression or World War II, as we find a similarly small coefficient for the period 1946 to 1975 (col. 2).²⁵

The bracketed values in Table 4 report the fraction of the variance in compensation that can be accounted for by each of the independent variables.²⁶ The firm-specific component of size explains between 13 and 17 percent of this variation in both periods, while idiosyncratic shocks to firm size account for another three to four percent. By contrast, the importance of aggregate firm size has changed substantially over time: it explains between 25 to 30 percent of the variation in pay from 1976 to 2005, but only two percent in the first half of our sample. The second panel of the table replaces the average size of each firm with a firm fixed effect, providing a more flexible way to control for firm-specific factors. The estimated coefficients on the other two variables are unchanged. Thus, the cross-sectional relationship between firm size and executive pay has remained relatively stable over the past 70 years, while upward and downward shifts in the distribution of firm size have only affected the level of compensation more recently.²⁷

4.2 Potential explanations for the changing role of aggregate market size

These preliminary results suggest that the dynamics of compensation arrangements have changed over time. One reason for this change could be that the level of pay is currently tied to contemporaneous fluctuations in firm size, whereas it was more responsive to lagged firm size in the past. For example, this difference in timing would result from switching from accounting-based to market-based measures of firm performance when determining incentive pay. However, panel 3 of Table 4 shows little support for this conjecture. Although the average market value in the previous year had a larger effect on compensation than the current value during the earlier sample period, the sum of these two coefficients is still considerably smaller than the corresponding sum in recent years.

Alternatively, our estimated coefficients in the earlier period may be biased downwards if firms responded to the high personal income tax rates during this period by increasing components of pay that we do not observe, such as pensions and perks. However, an exercise similar to our back-of-the envelope calculation in Section 3.3 suggests that it is unlikely that these components alone can explain the significant change in the correlation between aggregate market size and the level of pay.²⁸ If the growth rate of total compensation has a one-to-one correlation with aggregate firm size (as we find for the recent period), the level of compensation should have increased by a factor of 3.3 from 1950 to 1968. In this case, unobserved forms of pay would need to have amounted to $1.6 million by 1968, an improbably high level of perks and other benefits.

A third potential explanation is that the relevant measure of firm size has changed over time. However, our results are robust to using the value of sales instead of market value (see cols. 3 and 4 of Table 4).²⁹ Although the coefficients are two to three times larger for aggregate sales than aggregate market capitalization, the distribution of sales is far more dispersed (as indicated by the standard errors) and the fraction of the variance of compensation explained by each of these variables is about the same. Thus, using the value of sales as an alternative measure of firm size still suggests that the importance of the aggregate market was much smaller earlier in the century.

It is tempting to conclude that aggregate firm size has become a key determinant of executive pay during the past 30 years. However, these coefficients are only correlations and may be biased by spurious upward trends in firm size and the level of compensation. Indeed, adding a quadratic time trend to the regression reduces the coefficient on average market value a bit (panel 4 of Table 4). Moreover, tests for non-stationarity cannot reject the null hypothesis that there is a unit root in the residuals of equation 1 in either period.³⁰ To address this concern, we estimate the relationship between changes in compensation and changes in firm size (panel 5 of Table 4). The estimated effects of both the average size of the market and the idiosyncratic component of firm size are notably smaller in this specification, and they both explain a much smaller fraction of the variance in changes in pay than the corresponding specification in levels.³¹ Thus, the seemingly-strong correlation between average firm size and the level of pay of the past several decades may be driven by spurious correlation between the two variables.

In sum, a firm's relative position in the distribution of firm size has accounted for about 20 percent of the variation in the level of compensation for our entire sample period. By contrast, aggregate market size has become more strongly correlated with the level of executive pay since the 1970s, although this relationship may be spurious.

5. The evolution of pay-performance sensitivities over time

Sparked by the rise in stock option use and a concurrent surge in the level of executive pay, a marked increase in the correlation between managerial wealth and firm performance during the past 20 years has brought agency problems to the forefront of research in executive compensation (Murphy 1985, Jensen and Murphy 1990, Gibbons and Murphy 1990, Aggarwall and Samwick 1999, Bertrand and Mullainathan 2001, Bebchuk and Fried 2004). Although the recent surge in attention may lead to an impression that the conflict between managers and shareholders was not important in earlier times, this topic has been a concern ever since the separation of corporate ownership from corporate control in the early twentieth century (Baker and Crum 1935, Berle and Means 1932, Chandler 1977). However, a scarcity of data from earlier time periods has limited empirical studies of the long-run evolution of managerial incentives.³² The availability of detailed information is particularly important for the case of options, because changes in the value of stock option holdings account for a considerable portion of the increase in pay-to-performance during recent decades (Hall and Liebman 1998). Studies of option use prior to the 1970s used different methods to value options, and most estimates of managerial incentives did not include stock option revaluations. Because our dataset allows us to construct the portfolio holdings of stock and stock options for each executive, we are able to calculate consistent estimates of the sensitivity of managerial wealth to firm performance over the longer run.

5.1 Defining the appropriate measure of executive pay

Managerial decisions are influenced not only by the remuneration awarded in a given year but also by any other change in wealth that is tied to the performance of the firm (Jensen and Murphy 1990, Hall and Liebman 1998). Since the value of equity and stock options in the firm depends on firm value, a comprehensive analysis of pay-to-performance should include revaluations of an executive's stock and stock option holdings.³³

By depicting the long-run evolution of option awards and holdings, Figure 3 shows that stock options were already a major component of wealth by the 1960s. Although the fraction of executives receiving stock options prior to the 1980s was relatively modest, the fraction of individuals holding options was large. For example, 28 percent of the executives were granted an option in any given year in the 1960s, but more than 64 percent held options during this period. This difference arises because options had a long duration and vested slowly over time. Options are now a regular part of the compensation package, so almost all executives receive and hold options in a given year.

Equity holdings of top executives have declined over the century relative to the firm's total number of shares outstanding, with a more pronounced contraction among individuals who hold a larger fraction of the firm (see Table 5).³⁴ By 2005, median fractional stock holdings were about one third of their pre-war level.³⁵

Table 6 compares the level of total compensation to changes in an executive's wealth brought about by revaluations of his stock and option holdings.³⁶ We calculate these revaluations based on the number of shares held at the end of the previous year and firm's stock market return during the fiscal year (adjusted for stock splits and dividends). The dollar value of these changes in wealth increased in the past 25 years as the number of shares held by corporate officers rose. For most of the post-war period, the median change in wealth--including all forms of remuneration and revaluations of stock and option holdings--was 12 to 45 percent higher than the median level of total compensation. Revaluations of stock and option holdings were larger in the 1990s, as they amounted to 68 percent of total pay.

5.2 Defining measures of pay-to-performance

The empirical literature on executive compensation has used a wide range of specifications to measure the correlation between pay and firm performance.³⁷ Two common alternatives are the dollar change in executive wealth per dollar change in firm value (or the Jensen-Murphy statistic), and the dollar amount of wealth that an executive has at risk for a one percent change in the firm's value (or the value of equity at stake). The Jensen-Murphy statistic and the value of equity at stake are each an appropriate measure of incentives for a specific type of managerial decision.³⁸ In a simple agency model that allows the marginal product of managerial effort to vary with the value (or size) of the firm, the optimal level of effort (or strength of managerial incentives) depends on the type of CEO activity being considered (Baker and Hall 2004). The Jensen-Murphy statistic is the correct measure of incentives for activities whose dollar impact is the same regardless of the size of the firm, like buying a corporate jet, and the value of equity at stake is appropriate for actions whose value scales with firm size, like restructuring the firm.

Studies that focus solely on compensation and ignore revaluations of equity and option holdings often report a third measure of incentives: the percentage change in compensation for a 1 percent change in firm value (the elasticity of compensation). An analogous measure that includes revaluations of wealth would be the elasticity of wealth to firm performance (i.e. the percentage change in wealth for a percentage change in firm value). A log-log functional form for incentives can be obtained theoretically as the optimal contract if utility is CRRA (Himmelberg and Hubbard 2000) or from a model that embeds incentive pay in a competitive labor market (Edmans, Gabaix, and Landier 2007).³⁹ However, calculating this measure is problematic because we do not observe the level of an executive's total wealth but only firm-related wealth. If non-firm-related assets trended upward or downward over the century, ignoring these forms of wealth would lead to a systematic bias in our estimates of the level of total wealth, and consequently a bias in estimates of the percent change in wealth. Therefore, we focus on the Jensen-Murphy statistic and the value of equity at stake, but we return to this issue in Section 5.5 by calculating the elasticity of changes in wealth to firm performance.⁴⁰

5.3 Estimating pay-to-performance correlations

The value of equity at stake is the dollar value of wealth that an executive has at risk for a one percent change in firm value. We estimate this statistic as from the following regression:

$$\Delta (Exec._{ }Wealth)_{{ijt} }=\alpha _(t)^({ES} )+\beta _(t)^({ES} )r_{{jt} }+\varepsilon _{{ijt} } {\begin{array}{*{20}c} \hfill & \hfill & \hfill & \hfill \ \end{array} } [2]$$

where the firm's (real) rate of return during fiscal year , measures the percentage change in firm market value.⁴¹ To assess how has changed over time, we estimate the regression separately for the periods 1937-40, 1941-1949 (excluding 1946), 1950-59, 1960-69, 1970-1979, 1980-1989 and 1990-1999, and 2000-2005.⁴² The dependent variable is the change in the real value of all types of an executive's firm-related wealth, calculated as the sum of total compensation (salaries, bonuses, long-term incentive pay and stock option grants), changes in the value of stock option holdings, and changes in the value of firm stock holdings.

We use a similar regression to estimate the Jensen-Murphy statistic, where the firm's rate of return is replaced by the dollar change in the market value of the firm:

$$\Delta (Exec. Wealth)_{{ijt} }=\alpha _(t)^({JM} )+\beta _(t)^({JM} ) \Delta (ShareholderValue)_{{jt} }+\varepsilon _{{ijt} } [3]$$

where we measure the dollar change in shareholder value as , firm's rate of return during fiscal year multiplied by firm's market value in the previous year.

Because the distributions of compensation and wealth are highly skewed, OLS regressions will not provide an accurate picture of the pay-to-performance sensitivity facing the typical executive in our sample.⁴³ Therefore, we estimate equations [2] and [3] using a quantile regression to fit the conditional medians of the data.⁴⁴ Table 7 reports coefficient estimates and standard errors for the Jensen-Murphy statistic and the value of equity at stake.⁴⁵ With the exception of the first and last decades of the sample, the magnitude of the standard errors suggests that the coefficients are significantly different from one another.⁴⁶ In accordance with prior research, both measures show a large increase in pay-to-performance during the 1980s and 1990s (Hall and Liebman 1998, Murphy 1999).⁴⁷ However, a historical perspective reveals a more nuanced picture. The value of equity at stake trended upward over time, while the Jensen-Murphy statistic followed a U-shaped pattern over the century.⁴⁸

The correlation between pay and performance has been mainly driven by stock and stock option revaluations (see Table 8). Prior to the 1970s, equity holdings were the primary factor linking executive wealth to firm performance. Pay-to-performance has strengthened over time with the increase in the number of options held by executives, and options have become the most important type of wealth tying pay to performance in recent decades. However, the role of equity holdings is still significant, and their correlation with firm performance has also increased in recent decades.

5.4 Accounting for changes in the size of firms over time

The divergence between these two measures of pay-to-performance prior to the 1970s is partly due to growth in the size of firms. While the Jensen-Murphy statistic tends to be negatively correlated with firm size, the value of equity at stake is higher for larger firms.⁴⁹ Because the average market value of the firms in our sample increased by a factor of 3.5 from 1936 to 1970, it is not surprising that the value of equity at stake increased while the Jensen-Murphy statistic declined over this period. On the other hand, both measures rose from the 1970s to the 2000s despite another 3.5-fold increase in firm size. Thus, the growth in pay-to-performance during the past 30 years was strong enough to offset the natural downward trajectory of the Jensen-Murphy statistic as firms became larger.

To correct the long-run trends in pay-to-performance for the secular increase in firm size, we develop a regression-based method that relies on estimating pay-to-performance correlations for firms in specific size categories in each decade, and then comparing estimates for a given firm size from one decade to the next (see Appendix Section 4 for details). Since our firm-size adjustments are formed by comparing pay-to-performance correlations in subsequent decades, they do not provide size-adjusted estimates of the level of these correlations but only estimates of how these correlations would have changed over time if firm size had remained the same. Therefore, we index both the Jensen-Murphy statistic and the value of equity at stake to equal one in the 1930s and use average size-adjusted growth rates in pay-to-performance to obtain a new index value in each successive decade (see Figure 6). For comparison, the dashed lines in Figure 6 show indexes based on growth in the unadjusted statistics.

Adjusted for firm size, pay-to-performance followed a W-shaped pattern from the 1930s to the 1980s: its magnitude was about the same in the 1930s, the 1950s, the 1960s and the 1980s, and was somewhat lower in the 1940s and the 1970s. This pattern is largely driven by changes in the correlation of equity holdings with firm performance. Pay-to-performance strengthened considerably in the 1990s and 2000s, mostly due to a rising contribution from stock option wealth. Thus, even after accounting for changes in firm size, the pay-to-performance correlation was higher in the last 15 years of our sample than in any previous period.⁵⁰

The unusually low correlations in the 1940s and 1970s are not easy to explain. Although the correlation in the 1940 to 1945 period may have been held down by war-related compensation practices, we find low pay-to-performance for the 1946 to 1949 period as well. Thus, the war could only explain this lower correlation if its effects persisted for the entire decade. Alternatively, the decline in incentives in the 1940s and 1970s might be driven by a prevalence of negative economic shocks if executives' wealth responds more strongly to improvements than to deterioration in firm performance. However, this explanation is also unlikely because we obtain the same W-shaped pattern when estimating pay-to-performance with only positive changes in firm outcomes.⁵¹

5.5 Quantifying the size of the pay-to-performance correlation

In the standard principal-agent model, the optimal degree of managerial incentives is based on a number of unobservable factors such as the agents' risk aversion and the cost of managerial effort. Therefore, there is no theoretical benchmark of the "optimal" degree of pay-to-performance against which to contrast our results (Haubrich 1994). Nevertheless, we gauge the strength of incentives by calculating an executive's monetary return for a meaningful improvement in firm performance. Following Hall and Liebman (1998), we define a meaningful (but modest) improvement in firm performance as a movement from the median rate of return to the 70^th percentile rate of return.

To estimate the wealth at stake from this improvement, we calculate the dollar change in each executive's stock and option holdings if the price of the firm increased from the median rate of return in our sample (8.4 percent) to the 70^th percentile rate of return (22.7 percent).⁵² The median change in wealth across executives was over $2 million in the 1990s and 2000s, but considerably smaller in earlier decades (col. 1 of Table 9). Even though the dollar value of these changes in wealth rose significantly over time, the upward trend is not as steep when comparing these dollar values to a broad measure of compensation that includes salaries, bonuses, stock option grants, and revaluations of stock and options holdings at the median rate of return (col. 2). With the exception of the 1940s, an improvement in firm performance from the 50^th to the 70^th percentile has typically led to at least a 30 percent increase in this broad measure of compensation.⁵³ Moreover, the executive's return to this improvement in firm outcomes was about 50 percent of broad compensation in the 1960s, about as high as it was in the 1990s. Thus, the incentive for an executive to undertake actions leading to an improvement in firm performance of this magnitude has been substantial for most of our sample period. In other words, it appears that managerial incentives have not been "wildly inefficient" for most of the 20^th century, to paraphrase Hall and Liebman.

Finally, we divide the percent increase in compensation broadly defined (col. 2 of Table 9) by the improvement in the rate of return from the median to the 70^th percentile of performance. Because the numerator is calculated from changes in wealth as opposed the level of wealth, this measure reflects the elasticity of changes in wealth, a concept related to the elasticity of wealth discussed above. This elasticity was greater than 1.9 for every decade in our sample except the 1940s, and almost as large in the 1960s as it was in the 1990s and 2000s. Thus, this measure of pay-to-performance also suggests that managerial incentives were not small for most of the 20^th century.

Although incentives were never inconsequential, we do find significant fluctuations in pay-to-performance over time, as this correlation was much stronger in recent decades.⁵⁴ This result is not inconsistent with the theory that higher levels of pay have been needed to compensate executives for optimal increases in the strength of incentives. However, this explanation seems unlikely to fit the long-run trends in the level of pay because we find meaningful increases in pay-to-performance in periods that experienced little change in compensation.

We cast our findings in terms of managerial incentives, but we want to stress that we simply document changes in the correlation between executive wealth and the market value of firms. This correlation may motivate executives to improve firm value, but it does not reveal the intentions of shareholders. Although the evolution of pay-to-performance may reflect changes in the optimal contract between managers and shareholders, it also may be an unintentional byproduct of other factors that have altered the structure of executive pay.⁵⁵

6. Conclusion

In this paper, we document important changes in the level and the structure of executive pay from 1936 to 2005. The real value of total compensation followed a J-shaped pattern over our sample period. After a sharp decline during World War II, the level of pay increased at a modest rate from the mid-1940s to the mid-1970s, and then rose at an increasing rate from the 1970s to the present. The composition of executive compensation also changed considerably since the 1950s, as both stock options and other forms of incentive pay became larger shares of total compensation over time.

The relative stagnation of compensation during the 1950s and 1960s is surprising because the level of executive pay did not keep pace with the growing size of firms during this period. By contrast, pay and firm size have been more strongly correlated in recent decades. Decomposing the relationship between compensation and firm size into its cross-sectional and time series components, we find that the cross-sectional relationship has remained relatively stable over the past 70 years. On the other hand, while the level of pay moved almost one-to-one with the average market value of firms over the past 30 years, this correlation was one-tenth to one-third as large in the 1946-1975 period. Moreover, the strong correlation that we find in the later period may be biased upward by spurious correlation in the market value of firms and the level of pay.

The transformation in the structure of compensation over the past fifty years has important implications for managerial incentives because incentive pay ties an executive's wealth to the performance of the firm. Using a broad measure of executive compensation that includes salaries, bonuses, stock option grants, and revaluations of stock and stock option wealth, we find that the pay-performance sensitivities were considerable in most decades except the 1940s and the 1970s. Thus, compensation arrangements have served to tie the wealth of managers to firm performance -- and perhaps to align managerial incentives with shareholders' interests -- for most of the twentieth century.

The long-run trends in executive compensation allow us to reassess several common explanations for changes in the level and structure of pay over the past several decades. The data prior to the 1970s are inconsistent with theories of managerial rent-seeking, a competitive labor market for executives, and increases in managerial incentives. These explanations may still help to explain the recent surge in compensation, but only if the determinants of executive pay were different in the past. Plausible reasons for such a shift may involve changes in the nature of the tasks carried out by top executives (Murphy and Zábojník 2004, Frydman 2005), or in social norms that may have constrained inequality in earlier decades (Piketty and Saez 2003). Alternatively, changes in managerial pay over time may have been driven by other factors, such as the development of alternative job opportunities for executives (Kaplan and Rauh 2006), improvements in board diligence (Hermalin 2005), and the rise in peer group benchmarking (Murphy 1999). By providing a contrast to recent data, the long-run trends in managerial pay present a challenge that we hope will further our understanding of the determinants of executive compensation. 

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Table 1: Sample Summary Statistics

Statistic	1936-2005
Total # of person-year observations	15883
Total # of executives	2862
Average # of firms in each year	76
Average # of years each executive is observed	5.6
Median # of years each executive is observed	4
Fraction of obs. in firms with market value Ranked 1-50	39.0
Fraction of obs. in firms with market value Ranked 50-100	19.6
Fraction of obs. in firms with market value Ranked 100-200	19.1
Fraction of obs. in firms with market value Ranked 200-500	16.7
Fraction of obs. in firms with market value Ranked 500+	5.4

Note: Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. Rankings by market value are based on all firms appearing in the CRSP database, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock exchanges.

Table 2: Distribution of Job Titles

Job Title	Fraction of observations: Entire sample	Fraction of observations: 1936-1969	Fraction of observations: 1970-2005
Chairman of the board	21.2	15.8	25.9
Vice-chairman	6.4	2.0	10.3
President	28.5	31.6	25.9
Chief executive officer	15.3	2.3	26.8
Chief financial officer	1.8	0.0	3.4
Chief operating officer	5.0	0.2	9.1
Executive or senior vice-president	21.6	15.3	27.2
Vice-president	15.2	27.8	4.1
Treasurer	1.2	2.4	0.1
Comptroller	0.6	1.3	0.1
Other job title	8.7	8.4	9.0
Director	84.7	91.7	78.6

Note: Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. The sum of each column is greater than 100 percent because some officers hold multiple titles. Other categories not listed include "secretary," "chairman of the executive committee," and officers of subsidiaries.

Table 3: Real Value of Total Compensation by Percentile (Millions of $2000)

Percentile	1936 - 1939	1940 - 1945	1946 - 1949	1950 - 1959	1960 - 1969	1970 - 1979	1980 - 1989	1990 - 1999	2000 - 2005
Three Highest-Paid Officers: 10th percentile	0.36	0.4	0.36	0.39	0.45	0.47	0.57	0.91	1.31
Three Highest-Paid Officers: 25th percentile	0.53	0.59	0.53	0.55	0.60	0.64	0.85	1.35	2.19
Three Highest-Paid Officers: 50th percentile	0.85	0.80	0.72	0.77	0.83	0.93	1.33	2.36	4.08
Three Highest-Paid Officers: 75th percentile	1.24	1.15	1.01	1.09	1.18	1.31	2.05	4.43	9.42
Three Highest-Paid Officers: 90th percentile	1.80	1.59	1.53	1.63	1.66	1.84	3.18	8.29	16.9
Three Highest-Paid Officers: average	0.97	0.95	0.85	0.94	0.99	1.09	1.74	4.35	7.63
Median CEO	1.11	1.07	0.90	0.97	0.99	1.17	1.81	4.09	9.20
Median Other Top Officers	0.74	0.70	0.65	0.67	0.74	0.82	1.12	1.89	3.02
Within-Firm Ratio of CEO to Other Top Officers	1.50	1.48	1.38	1.43	1.29	1.42	1.58	2.00	2.58

Note: Total compensation is the sum of salaries, bonuses, long-term bonus payments, and the Black-Scholes value of stock option grants. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. In firms where the title "CEO" is not used, the CEO is identified as the president of the company. Other top officers include any executive among the three highest-paid who is not the CEO. The within-firm ratio is the median across firms of the ratio of the CEO's total compensation to the average compensation of the two other highest-paid officers in the firm.

Table 4
Compensation and Firm Size
Panel 1: DV = Ln(Comp>)
Panel 2: With Firm Fixed Effects
Panel 3: Including Lagged Size and Firm FE
Panel 4: Including Quadratic Time Trend and Firm FE
Panel 5: DV = Ln(Comp)

Size	Firm Size = Ln(Market Value), 1936-1975	Firm Size = Ln(Market Value), 1946-1975	Firm Size = Ln(Market Value), 1976-2005	Firm Size = Ln(Sales), 1946-1975	Firm Size = Ln(Sales), 1976-2005
Panel 1: Average Size in Year [fraction variance explained]	.088 (.026) [.010]	.137 (.025) [.020]	.935 (.035) [.332]	.157 (.032) [.017]	2.65 (0.12) [.259]
Panel 1: Average Firm Size [fraction variance explained]	.207 (.033) [.145]	.212 (.032) [.164]	.292 (.032) [.135]	.305 (.037) [.220]	.358 (.041) [.113]
Panel 1: Size - Firm Avg. - Year Avg. [fraction variance explained]	.183 (.038) [.039]	.200 (.041) [.036]	.265 (.032) [.043]	.240 (.052) [.041]	.346 (.048) [.032]
Panel 2: Average Size in Year		.134 (.024)	.970 (.037)	.149 (.031)	2.63 (0.11)
Panel 2: Size - Year Avg.		.219 (.040)	.313 (.028)	.277 (.046)	.388 (.046)
Panel 3: Average Size in Year		-.028 (.035)	.620 (.082)	.279 (.074)	2.26 (0.25)
Panel 3: Average Size in Year		.165 (.041)	.376 (.080)	-.115 (.061)	.406 (.223)
Panel 3: Size - Year Avg.		.188 (.037)	.364 (.037)	.208 (.044)	.393 (.066)
Panel 3: Size - Year Avg. in		.021 (.039)	-.062 (.029)	.086 (.029)	-.036 (.042)
Panel 4: Average Size in Year		.033 (.031)	.736 (.082)	.147 (.077)	-.264 (.165)
Panel 4: Size - Year Avg.		.224 (.039)	.304 (.027)	.277 (.046)	.382 (.041)
Panel 5: Average Size in Year		.004 (.030)	.221 (.077)	.147 (.064)	.188 (.156)
Panel 5: Size - Year Avg.		.095 (.029)	.269 (.035)	.065 (.026)	.128 (.114)

Note: Standard errors are shown in parentheses and are clustered by firm. Values in brackets show the fraction of the total variance explained by each independent variable. The dependent variable in panels 1 to 4 is the logarithm of total compensation and the dependent variable in panel 5 is the change in ln(compensation). Total compensation is the sum of salaries, bonuses, long-term bonus payments, and the Black-Scholes value of stock option grants, measured in $2000. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990.

Table 5: Managerial Stock Holdings Relative to Shares Outstanding (Percentage Points)

Year	25th percentile	50th percentile	75th percentile	CEOs (median)	Other Highest-Paid Officers (median)
1936-1940	.019	.111	.402	.130	.088
1941-1949	.010	.038	.159	.048	.031
1950-1959	.011	.035	.109	.043	.031
1960-1969	.012	.037	.103	.047	.034
1970-1979	.008	.023	.064	.039	.019
1980-1989	.008	.019	.054	.029	.015
1990-1999	.011	.030	.084	.069	.021
2000-2005	.010	.028	.074	.072	.018

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. See notes to Table 3 for definitions of "CEO" and "other highest-paid officers." The within-firm ratio is the median across firms of the ratio of the CEO's total compensation to the average compensation of the two other highest-paid officers in the firm.

Table 6: Mean and Median Changes in Executive Wealth (Millions of $2000). Panel A: Mean Change in Executive Wealth. Panel B: Median Change in Executive Wealth

year	Salaries and bonuses (1)	Value of option grants (2)	Total Compensation (3)		Revaluation of option holdings (4)	Revaluation of firm equity holdings (5)		Total change in executive wealth (6)
Panel A: 1936-1940	1.00	0.00	1.00		0.00	1.32		2.45
Panel A: 1941-1949	0.89	0.00	0.89		0.01	0.07		1.28
Panel A: 1950-1959	0.88	0.06	0.93		0.24	0.86		2.21
Panel A: 1960-1969	0.89	0.10	0.99		0.18	0.62		2.12
Panel A: 1970-1979	0.91	0.18	1.09		0.08	-0.52		1.95
Panel A: 1980-1989	1.28	0.45	1.74		0.57	2.14		5.05
Panel A: 1990-1999	2.43	1.92	4.35		3.64	8.03		17.4
Panel A: 2000-2005	4.50	3.15	7.65		0.78	1.92		11.4
Panel B: 1936-1940	0.86	0	0.87		0	0		0.90
Panel B: 1941-1949	0.76	0	0.76		0	0.03		0.92
Panel B: 1950-1959	0.74	0	0.77		0	0.08		1.10
Panel B: 1960-1969	0.77	0	0.83		0	0.04		0.98
Panel B: 1970-1979	0.80	0.04	0.93		0	0.01		1.04
Panel B: 1980-1989	1.03	0.19	1.33		0.11	0.08		1.93
Panel B: 1990-1999	1.58	0.59	2.36		0.35	0.23		3.97
Panel B: 2000-2005	2.48	1.21	4.11		0	0.13		4.03

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. Col. (1) is the value of salaries plus bonuses (both current and long-term). Col. (2) is the Black-Scholes value of stock option grants. Col. (3) is the sum of salaries, bonuses and stock options grants. Col. (4) is the change in the value of stock options held in the end of the previous year. Col. (5) is the change in the value of firm equity held in the end of the previous year. Col. (6) is the sum of total compensation and revaluations of stock and option holdings. The medians in Panel B are the median of the sum. The year 1946 is excluded; see footnote 42 for details.

Table 7: Correlation of Changes in Executive Wealth with Firm Performance, 1936-2005

Year	Dollar change in wealth for $1000 change in firm market value (Jensen-Murphy)	Dollar change in wealth for a 1 percent increase in firm's rate of return (Equity at Stake)
1936 - 1940	1.14 (0.66)	18,075 (5,122)
1941 - 1949	0.380 (0.121)	7,738 (1,867)
1950 - 1959	0.359 (0.096)	23,378 (2,865)
1960 - 1969	0.292 (0.125)	40,269 (7,067)
1970 - 1979	0.128 (0.048)	22,822 (3,710)
1980 - 1989	0.258 (0.072)	37,086 (5,151)
1990 - 1999	0.774 (0.270)	135,527 (22,986)
2000 - 2005	0.474 (0.092)	151,508 (30,123)

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. The change in executive wealth is defined as the sum of total compensation and the revaluation of stock and stock option holdings. Results are based on median regressions estimated separately for each decade. Standard errors are given in parentheses and are clustered by firm. The year 1946 is excluded from all calculations; see footnote 42 for details.

Table 8: Pay-to-Performance Correlations by Type of Wealth

Year	Compensation - Dollar change in compensation for $1000 dollar change in firm market value (Jensen-Murphy)	Option Holdings - Dollar change in compensation for $1000 dollar change in firm market value (Jensen-Murphy)	Stock Holdings - Dollar change in compensation for $1000 dollar change in firm market value (Jensen-Murphy)	Compensation - Dollar change in compensation for a 1 percent increase in firm's rate of return (Equity at Stake)	Option Holdings - Dollar change in compensation for a 1 percent increase in firm's rate of return (Equity at Stake)	Stock Holdings - Dollar change in compensation for a 1 percent increase in firm's rate of return (Equity at Stake)
1936 - 1940	0.051 (0.030)	0 -	1.015 (0.487)	276 (891)	0 -	18,132 (3,878)
1941 - 1949	0.118 (0.061)	0 -	0.315 (0.094)	516 (595)	0 -	5058 (1,131)
1950 - 1959	0.061 (0.016)	0 -	0.195 (0.036)	1,170 (638)	0 -	11,602 (2,423)
1960 - 1969	0.010 (0.007)	0.043 (0.010)	0.167 (0.080)	-472 (657)	6,654 (1,623)	21,939 (3,680)
1970 - 1979	-0.003 (0.004)	0.032 (0.014)	0.084 (0.034)	5 (610)	4,201 (922)	12,374 (2,395)
1980 - 1989	0.035 (0.015)	0.099 (0.021)	0.094 (0.027)	3,509 (1,284)	10,496 (1,955)	13,825 (2,260)
1990 - 1999	0.109 (0.017)	0.357 (0.046)	0.219 (0.098)	16,839 (4,076)	57,587 (9,680)	37,408 (7,907)
2000 - 2005	0.011 (0.037)	0.263 (0.045)	0.167 (0.053)	8,951 (11,242)	84,901 (22,390)	44,401 (6,783)

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. Estimates are based on median regressions estimated separately for each type of wealth in each decade. Totals across each row do not add up to the correlation of changes in total wealth reported in Table 6 because the estimates are based on median regressions. Compensation is the sum of salaries, bonuses, and the Black-Scholes value of stock option grants. Option holdings are the revaluation of stock options held at the end of the previous year. Stock holdings are the revaluation of company stock held at the end of the previous year. The year 1946 is excluded from all calculations; see footnote 42 for details.

Table 9: The Strength of Managerial Incentives: Change in Wealth Due to Raising the Firm's Rate of Return from the 50th to the 70th Percentile (Median Across Executives)

Year	(1): $ change in wealth	(2): Percent change in wealth =	(3): Elasticity =
1936 - 1940	278,611	29.6	2.07
1941 - 1949	103,838	9.8	0.68
1950 - 1959	246,359	27.7	1.93
1960 - 1969	624,862	51.9	3.63
1970 - 1979	353,664	30.4	2.12
1980 - 1989	652,647	30.3	2.11
1990 - 1999	2,212,950	55.8	3.90
2000 - 2005	3,851,259	60.9	4.26

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. The dollar change in wealth is defined as the revaluation of stock and option holdings assuming a rate of return at the 70^th percentile (22.7%) minus the revaluation evaluated at the 50^th percentile rate of return (8.4%). Col. (1) shows the median of this value across executives. Col. (2) divides the dollar change in wealth from col. 1 by the total change in an executive's wealth at median firm performance, defined as the revaluation of stock and option holdings at the 50^th percentile rate of return plus salaries, bonuses and stock option grants. Col. (3) divides col. (2) by the percentage difference in firm value between the 50^th and 70^th percentiles of firm performance (22.7 - 8.4 = 14.3%).

Figure 1

Median Value of Total Compensation, 1936-2005

Figure 1 Data

Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Relative compensation is defined as total compensation divided by total wage and salary accruals per full-time equivalent employee from table 6.6 of the National Income and Product Accounts. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990.

Figure 2

Structure of Total Compensation, 1936-2005

Figure 2 Data

Note: Each line shows the median value of compensation defined as an increasing number of types. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990.

Figure 3

Fraction of Top Executives Granted and Holding Stock Options

Figure 3 Data

Note: Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. Fraction of executives granted options includes imputations for cases when only the cumulative number options awarded over a multi-year period is reported. See Appendix Section 2.3 for details.

Figure 4

Median Total Compensation by Firm Size

Figure 4 Data

Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. Rankings by market value are based on all firms appearing in the CRSP database, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock markets.

Figure 5

Total Compensation and the S&P Index

Figure 5 Data

Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. The S&P index is expressed relative to the CPI and equals 1 in 2000.

Figure 6

Unadjusted and Size-Adjusted Indexes of Pay-to-Performance

Figure 6 Data

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. All measures are indexed to 1 for the 1936-40 period. Results are based on median regressions estimated separately for each decade. The unadjusted ES is the value of equity at stake and the unadjusted JM is the Jensen-Murphy statistic estimated from equations 2 and 3 in the text. Size adjustments are described in Section 5.4 and Appendix Section 4. The year 1946 is excluded from all regressions; see footnote 42 for details.

Data Appendix to Executive Compensation: A New View from a Long-Run Perspective 1936-2005

1. Sample Selection

1.1 Selecting Firms

Our sample includes data on executives working in the largest 50 firms in 1940, 1960 and 1990. For 1960 and 1990, we measure firm size by the total value of sales and obtain company rankings from Compustat.⁵⁶ Because Compustat's coverage is incomplete prior to 1978, we crosscheck the 1960 ranking with a list of the largest manufacturing firms published by Fortune magazine and add firms that are missing from Compustat.⁵⁷ For 1940, a rank ordering of firms by the value of total sales was not available from either Compustat or any other published surveys. Therefore, we rank firms by their total market value using the Center for Research in Security Prices (CRSP) database.⁵⁸

Our information on executive compensation comes from historical proxy statements and 10-K reports, which were mainly obtained from the collection at Harvard Business School's Baker Library. To facilitate the data collection process we limit our sample to firms for which the Baker Library has proxy statements for a large number of years. To be specific, we only use firms for which we can find information for at least 20 years in a 30-year window. These 30-year windows are 1936-1966 for the 1940 sample, 1943-1973 for the 1960 sample, and 1970-2000 for the 1990 sample. In addition, we also require that annual data must be available for at least three blocks of five consecutive years within this 30-year period. This requirement is necessary because only consecutive data on stock option grants and exercises can allow us to reliably estimate an individual's holdings of unexercised stock options. If a firm does not meet these criteria, we replace it with the next largest firm on the list. In this manner, we move down the rankings until we have a total of 50 firms for each list of rankings. Because the ranking of firms is fairly consistent over time, our final sample includes a total of 101 firms. For each firm that meets our selection criteria, we collect annual data for all of the years for which proxy statements or 10-Ks are available. Appendix Table A1 lists the firms in our sample, the years they appear and their industrial classification.

An important issue related to the selection of the firms in our sample is how to treat mergers. Our intent is to keep a post-merger company in the sample if the new firm is similar to the original company. Therefore, we continue to follow a company for as long as the firm maintains the same permanent company identification number (PERMNO) in the CRSP database. We also include a post-merger firm with a different permanent number if either (1) all or part of the name of the old company is retained in the new company's name, or (2) the 2-digit SIC code of the new and the old company are the same. Out of the 101 firms in our sample, there are seven cases where a firm's identification number changes but it retains the name of the original firm, and 25 cases where the identification number and name changes but the industrial classification remains the same. There are 11 cases where we stop following a firm after a merger because the new firm takes on an entirely new name and operates in a different industry. There are also another 14 cases where we cease to follow a firm because it becomes foreign-owned (and therefore not subject to the Securities and Exchange Commission (SEC) reporting requirements) or because the firm has gone out of business.

1.2 Selecting Executives in Each Firm

During the 1930s, the SEC required firms to report remuneration for each of their three highest paid officers. This requirement was extended in 1943 to include any additional officers who earned above a nominal cutoff, which was subsequently raised over time. From 1978 to the present, the disclosure requirements were extended to the five most highly compensated officers. We collected information on the 5-highest paid officers in each firm whenever possible, but our main sample excludes the 4^th and 5^th highest-paid executives because only high-paying firms reported the remuneration of these officers prior to 1978.⁵⁹ We also exclude executives who did not work for the entire fiscal year.

1.3 Collecting Firm-Level Data

We measure the market value of each firm in our sample as the number of shares outstanding multiplied by the end-of-fiscal year market price, both of which are reported in CRSP. The total value of sales in each firm is from Compustat (data12), which is available for most companies from 1950 to the present. For years prior to 1950, we collected data on total sales from various editions of Moody's Industrial Manual, Moody's Transportation Manual, and Moody's Public Utility Manual.

2. Measuring Executive Compensation

2.1 Collecting Information from Proxy Statements

Our compensation data were hand-collected from corporate reports that were filed with the SEC, which has required firms to disclose this information since 1934. Prior to 1942, the information was disclosed in 10-K reports, which included the name, job title, and aggregate remuneration (normally defined as cash salary and bonuses) paid to each of the three highest-paid officers. In 1942, the SEC introduced executive compensation as an item in proxy statements and began to require detailed quantitative and qualitative information on the major forms of remuneration. Therefore, we collect data from proxy statements between 1943 and 1992 (thus for data pertaining to 1942 to 1991), and extend our sample back to 1936 using 10-K reports.⁶⁰ From 1992 to 2005, we use information on executive pay from Computstat's Executive Compensation (ExecuComp) database. These data are also obtained from proxy statements, and so are comparable to our hand-collected data.

We obtain information on executive pay from several parts of the proxy statement. As required by the SEC, each proxy statement contains a table listing the remuneration of the highest paid officers in the firm. This table provides data on cash remuneration, long-term bonuses and, frequently, job titles. Information on stock option grants and exercises generally follows this table. Many proxy statements also include a description of incentive pay or stock option plans that were in effect at the time. These descriptions include details on the characteristics of stock option and bonus awards (for example, the vesting structure of options and deferred bonuses, the tax status of stock options, and the method used to calculate incentive compensation). Proxy statements also contain a table listing the holdings of company stock for nominees for director. This table allows us to record the equity holdings of officers who were also directors, which comprises more than 80 percent of the executives in our sample.

2.2 Measurement of salary and bonus payments

Salary and current bonus payments: Salary plus any bonus both awarded and paid out in the same year. These bonuses were generally in the form of cash, although some were given in stock. Stock bonuses are valued using the stock price on the day the stock was given to the executive. When the stock price on the grant date is missing, we use the stock price at the end of the fiscal year. In many cases cash remuneration is reported as one lump-sum, so we are unable to separate straight salary from bonus payments. In about five percent of the sample, cash remuneration also includes payments from long-term incentive awards as well as current-year bonuses.

Long-term incentive payments: Payments made to the executive as compensation for bonuses awarded in prior years. Many long-term incentive plans were structured to pay bonuses in equal installments during the four to five years after they are awarded. Although we would prefer to attribute all bonus awards to the year in which they are granted, the majority of firms only report the cash amounts paid to the executive in each year. In cases where the firm reports the amount awarded, we convert the award into future payments using the structure of the bonus plan to estimate the amount paid out each year. In earlier decades, the majority of these bonuses were paid in cash, but a few are awarded in stock. Bonuses awarded in stock became more common over time as restricted stock grants became more prevalent. Stock bonuses are valued using the stock price at the end of the fiscal year in which the stock is received. Since the realization of performance measures for contingent awards are usually not observable, contingent bonuses are only included when the amounts paid out are reported.

2.3 Measurement of stock options

Options granted: We value options on the day they were granted using the following Black-Scholes formula:

$$\begin{array}{l} Award value=N[Pe^{dT}\Phi (Z)-Ee^{rT}\Phi (Z-\sigma \sqrt T )] \ Z=\frac{\ln \left( {\frac{P}{E}} \right)+T(r-d-\frac{1}{2}\sigma ^{2})}{\sigma \sqrt T } \ \end{array}$$

N = number of shares awarded

P = stock price on the date of the award. In most cases we assume this price is equal to the exercise price of the stock (see below for details).

E = exercise price of the stock option.

d = monthly dividend rate = 1/12*ln(1+D/S) where D is the total value of dividends paid in the previous year and S is the average stock price in the previous year.

T = time to expiration of the option, measured in months.

r = monthly yield on US treasury securities. We use the 3-year constant maturity interest rate from Global Insight's DRI-WEFA Basic Economic Database.

standard deviation of monthly stock returns. Monthly stock returns are obtained from the CRSP database and are corrected for stock splits and dividend payments. We calculate the standard deviation using the three prior years of monthly data.

cumulative probability function for the normal distribution

Except for the dividend rate, the interest rate, and the standard deviation of stock returns, the proxy statements generally contain all of the information necessary to implement the Black-Scholes formula. However, we impute the values of an option's duration or exercise price in some cases where this information is missing. Before 1964, the typical stock option plan granted options that expired after ten years and had an exercise price ranging from 95 to 100 percent of the market price of the stock on the day it was granted. These characteristics were fairly standard because an option with these characteristics was subject to capital gains tax rates instead of income tax rates under the 1950 Revenue Act. When the 1964 Revenue Act replaced "restricted" with "qualified" stock options, these requirements were changed to an exercise price of 100% and duration of five years. The majority of the firms in our sample revised their stock option plans to conform to these new rules. As the tax incentive to grant stock options diminished during the 1970s, firms began granting a larger number of non-qualified options with a 10-year duration. Therefore, when information on the duration of an option is missing, we assume that it was ten years if the option was granted prior to 1964 or between 1974 and 1992, and five years if it was granted between 1964 and 1973. This imputation is made for 16 percent of the sample prior to 1992, with most missing information occurring during the 1970s and 1980s. Compustat does not report the duration of option grants, so we assume a horizon of seven years for all options granted after 1992.⁶¹ Because the vast majority of the options granted after 1950 had an exercise price equal to the stock price on the day of the grant, we assume that the stock price on the day of the award is equal to the exercise price for all options grants after this year.⁶² For years prior to 1950, a much larger number of options were granted in-the-money. However, we frequently do not know the exact grant date of these options so we are unable to calculate their value on the day they were granted. Instead, we value these options using the end-of-fiscal year market price.

We also impute the number of options granted in cases where the firm reported only the total number of options awarded to each executive during the previous three or five years, a reporting practice what was common from the late 1960s to the late 1980s. Wherever possible, we combine these cumulative option awards with information on annual grants and exercises from previous proxy statements to estimate the amounts granted for each executive in an individual year. However, this imputation cannot be made for executives who do not appear in all of the previous three or five proxy statements, or if the proxy statement for an intervening year is missing.⁶³ Because roughly 27 percent of the firms in the 1970s and 20 percent of the firms in the 1980s reported options in this manner, excluding this information would severely bias downward our estimates of option grants. Instead, when we can not impute the grants and exercises for a given year, we assume that one-fifth of the 5-year totals were granted in each of the past five years, or one-third of the 3-year totals in each of the past three years. We assume that the exercise price of these options was equal to the end-of-fiscal-year stock price.

Appendix Figure A1 shows the frequency of stock option grants both including and excluding these imputed values. Our procedure raises the probability of receiving an option by 20 to 30 percentage points during the 1970s and 1980s. Including the imputations also alters the trend in the use of options, making the rise in stock option grants steeper in the 1960s and flatter in the 1980s. During periods when a large fraction of option grants are imputed, our assessment of the correlation between annual option grants (and therefore total compensation) and firm performance will be less accurate.⁶⁴ Despite the substantial impact on our estimates of the frequency of option grants, this imputation strategy has only a minor effect on the value of total compensation (see Appendix Figure A2). These imputations raise the median real value of total compensation by less than $0.1 million for most of our sample, and do not appreciably alter the long-run trend.

Options exercised: Proxy statements issued from the 1950s to the 1970s generally report the number of options exercised, the exercise price (adjusted for stock splits) and the market value of the stock on the date of purchase. Using this information, we value gains from exercising options as the difference between the exercise price and the average stock price on the day the option was exercised. The exercise price is only missing for less than two percent of the observations on stock option exercises, so we do not impute values for these cases. Proxy statements issued during the 1980s and 1990s generally report the total gains from exercising options, but not the number. In these cases, we assume the executive exercised his oldest options first in order to back out the number exercised (which is needed to estimate each executive's stock option holdings).

Analogous to the reporting of option grants, the number of options exercised were also reported in 3- and 5-year totals during the 1970s and 1980s. We impute the number exercised from these totals using a procedure similar to the one used for option grants. Appendix Figure A3 shows the frequency of option exercises including and excluding these imputations. In this case, the biggest effect of our imputations is from the late 1960s to the late 1970s, when it raises our estimates of the frequency of options exercised by about ten percentage points.

Stock option holdings: We calculate the number of options held by an executive as the number he held the previous year plus the number granted, less the number exercised and the number that expired during the year. To value these holdings using the Black-Scholes formula, we need the exercise price and remaining duration of each option included in these holdings. These statistics are not generally reported in proxy statements, so we gather this information by following the exercise price and duration of the options each executive receives and exercises in each year. In cases for which information on the exercise price or remaining duration of an option grant is missing, we assume that the exercise price is the closing price at the end of the fiscal year of the grant year and that options granted before 1964 or after 1974 have a duration of ten years, while options granted between 1964 and 1974 have a duration of five years. This method may underestimate an executive's total stock option holdings because many executives are likely to have been granted stock options before we observe them in our data. However, during the 1970s most firms also began to report the total number of options held by each executive. About one third of our estimates match the reported totals exactly, and we adjust our calculated holdings to match the reported totals for the other two thirds (following Hall and Liebman 1998). Our estimates do not appear to be significantly biased, as the average difference between our estimates and the reported totals is 586 options (0.2 percent of the average number of options held for executives with positive holdings) and the median difference is zero. In cases where our estimates are greater than the reported totals, we assume that the oldest options in the portfolio were exercised first. In cases where we calculate fewer option holdings than reported, we assume that the missing options were granted in the year prior to the first year that we observe the executive.

2.4 Equity holdings

Equity holdings are valued with the stock price at the end of the fiscal year. We include shares that are held by family members and associates. Equity holdings were only reported in proxy statements for officers who were also directors, and occasionally only for directors who were also up for re-election. Nonetheless, we observe stock holdings for 88 percent of our sample from 1942-2005. Because 10-K reports did not list the equity held by officers and directors, stock holdings for the 1935-41 period are based on the bi-monthly reports of the SEC, Official Summary of Security Transactions and Holdings. These reports record the equity purchases and sales of every officer and director in publicly-traded corporations and public utilities. At the time of a transaction, an officer's total holdings of company stock are also reported. Using these reports, we collected information on the holdings of company stock of any officer who made a transaction during a year. If an officer did not appear in any reports for a given year, we assume he owned the same amount of stock as in the previous year. We obtain an initial estimate of stock holdings in 1935 from the Official Summary of Holdings of Officers, Directors and Principal Stockholders, which reports the holdings of all officers in each firm for that year. If an individual was not an officer or director in 1935, we will not observe his equity holdings until the first year in which he makes a transaction. Thus, our estimates during the 1936-41 period may be biased upward if officers with less tenure in the company held smaller shares of stock. We are able to assess the magnitude of this bias by comparing our estimated stock holding to the proxy statements issued in the 1936-41 period that did report officers' equity holdings. Our estimated stock holdings match the proxy statements' data about 50 percent of the time, and they do not appear to be significantly biased. The average difference between our estimates and the reported totals is 2000 shares (20 percent of the average number of shares held) and the median difference is 50 shares (three percent of the median number of shares held).

3. Evaluating the Representativeness of our Sample

3.1 Salary and Bonus

Appendix Table A3 shows the distribution of the firms in our sample ranked by their market value.⁶⁵ To calculate these rankings, we define the universe of firms as those in Compustat listed as being traded on the S&P, NYSE, ASE or NASDAQ. For the years prior to 1951, the universe is all firms listed in CRSP. Most firms are ranked among the 100 largest, but the sample also includes smaller firms that will either become large in future years or that were large in the past. Despite a decline in our firms' rankings over time, nearly half of them still ranked among the top 100 by the end of our sample period.

Because our sample is heavily weighted towards large firms, a natural concern is that the trends we document are not representative of the typical publicly-traded firm.⁶⁶ Therefore, we evaluate the representativeness of our sample by comparing it to three other datasets that reflect compensation in the S&P 500. The first sample is the Forbes survey, which has reported the pay levels for CEOs in the 800 largest publicly-traded corporations since 1970. The second sample is from Hall & Liebman (1998), who collected data on CEO compensation from 1980 to 1994 using a random sample of 478 firms from the Forbes 500 rankings.⁶⁷ Finally, we use ExecuComp, which provides data on the compensation of the highest-paid officers in the S&P 500 for the 1992-1993 period, and in the S&P 1500 since 1994. As far as we are aware, no comprehensive dataset would provide us with a useful comparison group prior to the 1970s.

Appendix Figure A4 compares the median real value of salaries and bonuses of CEOs in our sample to these three other samples for firms in three different size categories according to their market value: firms among the largest 100, firms ranked 100 to 300, and firms ranked 300 to 500. Although the level of pay in the two smaller size categories is somewhat higher in our data than in the broader samples, the trends are similar.⁶⁸ From 1970 to 2005, median salary and bonus in the largest firm-size category in our sample increased at an annual rate of 4.8 percent, compared with 4.0 percent in the more representative samples. The corresponding growth rates for the mid-sized category are 2.4 percent and 2.3 percent, respectively, while they are 2.6 percent and 2.1 percent respectively for the smallest category.⁶⁹

If we assume that the differential between our data and the broader samples was similar in earlier time periods, we can estimate nationally-representative trends in cash compensation for our entire sample period by reweighting firms according to the national distribution of firm size. Appendix Figure A5 shows the trends in median compensation --again defined only as current salary and bonus payments--where each firm is assigned a weight inversely proportional to its probability of being in our sample.⁷⁰ These probabilities are calculated as the fraction of firms of a given size category in our sample relative to the total number of firms in that group. We define five size categories: the largest 50, firms ranked 50-100, firms ranked 100-200, firms ranked 200-300 and firms ranked 300-500.⁷¹ Because the smallest firms in our sample are the least likely to be representative of other firms of similar size, we also consider weights scaled to reflect only the largest 300 publicly-traded firms. For most of our sample period, the median of our unweighted sample is similar to the median of the top 300 firms in the economy, while it is somewhat higher than the median of the top 500 firms. Therefore, we conclude that our data on salaries and bonuses are broadly representative of the largest 300 publicly-traded firms in the economy.

3.2 Stock Options

We are only able to evaluate the representativeness of stock option grants in our sample from 1980 to 2005 because the Forbes survey does not report information on option grants. Appendix Figure A6 compares the median value of stock option grants in our sample to the Hall-Liebman and ExecuComp datasets. Our data line up well with the other samples for firms ranked among the 100 largest, but our estimates of grants in smaller firms are somewhat larger than the Hall-Liebman sample in the 1980s. For the smallest group of firms, our estimates are also noisy due to the small sample size.

The discrepancy in the use of stock options can be partly attributed to our imputation of option grants from the multi-year totals reported in the proxy statements (see Section 2.3 above). This imputation smooths out grants over a period of several years, raising the frequency of stock option grants. In the Hall-Liebman sample, firms that reported multi-year totals were contacted by mail to provide annual information. Due to a high response rate to this inquiry, the Hall-Liebman sample has few cases where annual option grants are unknown.⁷² Although option grants were probably lumpier than our data suggest, the total value of options granted to each individual in our sample should be accurate. Among the 45 firms that appear in both our sample and the Hall-Liebman datasets, the average value of options granted from 1980 to 1989 was $0.42 million in our data, compared with $0.40 million in the Hall-Liebman data.

A second reason why we find a greater extent of option use in the 1980s may be that the use of stock options in the smaller firms in our sample may not be representative of a typical publicly-traded firm of a similar size. Since our sample consists of firms that were successful in at least one point in time, some of the smaller firms in our sample may be experiencing a temporary negative shock. Because stock option policies typically last for several years, option grants in these firms may look more similar to larger firms than to firms that have always been small. Indeed, the Hall-Liebman sample shows a more pronounced positive correlation of option grants with firm size (see Appendix Table A4). Thus, the composition of pay in firms smaller than the top 100 in our data may be more heavily weighted towards options than the typical publicly-traded firm in the economy.

Although no nationally-representative data on stock option grants exist prior to the 1980s, Lewellen (1968) calculates the value of options in a sample of 50 large manufacturing firms from 1940 to 1963. He finds a much higher value of stock options than we find in our sample. This disparity can be explained by differences in the methodologies of valuing options. Whereas we use the Black-Scholes formula to value options in the year they are granted, Lewellen calculates the difference between an option's exercise price and the market price of the company's stock at the end of each fiscal year, and then spreads these potential gains from stock appreciation over the duration of the option.⁷³ Gains from exercising options were significantly higher than the value of grants during this period, so this ex-post valuation method overstates the value of option grants. More importantly, Lewellen's statistics greatly overstate the value of options because he reports a "before-tax equivalent value," which he defines as the before-tax value of salaries that an executive would need to receive in order to achieve an after-tax level of pay equivalent to the potential gains from exercising his stock options. Because options were taxed at a much lower rate than cash salaries, this valuation is substantially larger than the simple (before-tax) value of option grants that we use in our analysis.

3.3 Total Compensation

To assess the effect that the possible overestimation of stock option grants in small firms may have on our measure of total compensation, we calculate an alternative value of grants using the relationship between option grants, total pay, and firm size in the Hall-Liebman sample. For all firms ranked lower than 100, we assume the share of option grants in total compensation to be proportional to the average share of grants in firms ranked in the top 100 in that year. This proportion is based on the Hall-Liebman sample, which we calculate separately for the periods 1980-84 and 1985-89. By splitting the data into these two periods, we smooth through the noise in annual grants while still accounting for the spread of options to smaller firms over time. Because we have no other evidence on option grants prior to 1980, we apply the 1980-84 shares in the Hall-Liebman data to all years prior to 1980. For example, for a firm ranked 150^th in 1984 or in any prior year, we assume that the share of options in total pay is 0.101/0.164=62 percent of the share of option grants in the largest 100 firms in that year (see Appendix Table A4). For 1990 onwards we use actual option grants because our data are similar to the Hall-Liebman and ExecuComp data in that period. We also use actual option grants for firms ranked in the top 100 because our data are not biased in large firms.

Appendix Figure A7 compares median compensation of the three highest-paid officers in each firm in our unweighted sample to total pay using this alternative assumption for stock option grants. The alternative assumption reduces the level of pay a bit in the 1950s through the 1980s, but the effect is minor. The figure also shows the alternative compensation measure weighted to reflect the largest 300 publicly-traded firms using the probability weights discussed in Appendix Section 3.1. By using both the probability weights and the alternate stock option assumption, this series reflects our best estimate of the long-run trend in compensation in large publicly-traded firms. Although the combination of reweighting and adjusted stock option grants reduces our estimates of compensation by about ten percent in the years prior to 1990, this decrease does not alter the long-run trend in executive pay in any meaningful way. Therefore, we conclude that the unweighted statistics we present in the main body of the paper accurately reflect the trends in compensation in the 300 largest publicly-traded firms in the economy.

Because our data present a reasonably accurate picture of compensation in large firms, we can approximate alternate sampling schemes by assigning different weights to the firms in our sample. In Appendix Table A5, we report sampling schemes that are inversely proportional to either the firm's market share or the firm's share of aggregate sales. These weights would be appropriate if a firm's probability of selection was proportional to its market value or to its value of sales, respectively. The table reports median total pay separately for firms ranked in the top 100 and for firms ranked between 100 and 300. For comparison, we also report medians for each of these groups using weights based on the probability of selection into our sample, as described in Section 3.1. All columns in the table use the alternate estimate of option grants based on the Hall-Liebman data. The trends in pay are similar for all weighting schemes.

Appendix Table A5 reveals some interesting differences between the largest publicly-traded firms and the somewhat smaller firms. The differential in pay between these two groups was roughly stable from 1950 to 1979, but has widened noticeably during the past 25 years. This gap was also larger prior to World War II. In fact, median compensation in the smaller group increased from the 1930s to the 1940s while the level of pay in the largest firms fell. Therefore, the decline in the real value of compensation that we document for this period in the main body of this paper was concentrated in the very largest firms in the economy. More generally, differentials in pay by firm size have followed the well-documented U-shaped pattern in income inequality over the course of the century, contracting during World War II and widening in recent decades.

4. Correcting pay-to-performance estimates for growth in firm size

The two main statistics used to measure pay-to-performance--the Jensen-Murphy statistic and the value of equity at stake--are both correlated with firm size. Because the scale of firms has increased substantially over the course of the century, it is important to account for changes in firm size when analyzing the long-run trends in pay-to-performance. We use a regression-based method to correct our pay-to-performance estimates for changes in the size of firms. The basic idea of this strategy is to estimate pay-to-performance correlations for firms in specific size categories in each decade, and then to compare estimates for a given firm size from one decade to the next.

To adjust the Jensen-Murphy statistic we interact the change in market value in equation [2] with a spline function based on quintiles of the firm-size distribution, as follows:

$$\begin{array}{l} \Delta (Exec. Wealth)_{{ijt} }=\alpha _(t)^({JM} )+\beta _(t)^({JM} )\Delta (Shareholder Value)_{{jt} }+ \ +\sum\limits_s {\beta _(t)^({JM,s} )\Delta (Shareholder Value)_{{jt} }I_{s }+\sum\limits_s {\theta _(t)^(s )I_{{st} }+\varepsilon _{{ijt} }} } \ \end{array}$$

where are dummy variables for quintiles of the distribution of firm size in each decade. We measure firm size as the average market value of the firm during the previous three years. For each firm in our sample, we predict a Jensen-Murphy statistic as the fitted value from this regression. We also predict an alternative Jensen-Murphy statistic for each firm using the coefficient estimates and the distribution of firm size from the previous decade. The difference between these two estimates reflects the change in the Jensen-Murphy statistic for each firm of a given size.

For example, a firm with a market value of $3.1 billion in the 1960s falls in the 24^th percentile for that decade, and so it would have a predicted Jensen-Murphy statistic of . The same firm would have fallen in the 57^th percentile of the 1950 distribution of firm size, and so its predicted Jensen-Murphy statistic for prior decade would be . The difference between these two statistics reflects the change in pay-for-performance from the 1950s to the 1960s for this firm.

This method generates a range of estimates of changes in pay-to-performance based on the distribution of firm sizes in our data. Appendix Table A6 reports the mean and median change in pay-to-performance across all of the firms in our sample, along with the predicted change in pay-to-performance at the median firm size in each decade. All three statistics provide a similar picture of the evolution of pay-to-performance over time.⁷⁴ The index shown in Figure 8 of the paper is based on the average across firms, because we believe the average provides the best estimate of the typical change in pay-to-performance in our sample.⁷⁵ We follow a similar technique to adjust the value of equity at stake for changes in firm size.⁷⁶

Table A1: Firms Included in the Sample

Company Name	First Year in Sample	Last Year in Sample	Rank in 1940	Rank in 1960	Rank in 1990	Industry
AETNA LIFE & CASUALTY CO	1964	2005	-	-	48	Insurance carriers
ALLIED CHEMICAL CORP	1936	2005	16	65	82	Chemical mfg
AMERICAN CAN CO	1936	2005	34	42	200	Fabricated metal products
AMERICAN EXPRESS CO	1977	2005	-	-	36	Depository institutions
AMERICAN INTERNATIONAL GROUP INC	1970	2005	-	-	59	Holding and other investment offices
AMERICAN MOTORS CORP	1937	1986	302	43	-	Motor vehicles
AMERICAN STORES CO	1936	1998	263	48	39	Food stores
AMERICAN TELEPHONE & TELEG CO	1942	2004	1	3	10	Communications
AMERICAN TOB CO	1936	2005	36	71	146	Tobacco mfg
ANACONDA COPPER MNG CO	1936	1975	31	82	-	Primary metals
ARMCO INC	1937	2005	212	55	534	Primary metals
ARMOUR & CO	1936	1969	228	22	-	Food mfg
ATLANTIC RICHFIELD CO	1936	1999	104	90	52	Petroleum mfg
BELLSOUTH CORP	1984	2005	-	-	66	Holding and other investment offices
BETHLEHEM STEEL CORP	1936	2000	25	15	246	Primary metals
BOEING CO	1936	2005	234	26	32	Motor vehicles
BORDEN CO	1936	1992	84	53	163	Food mfg
C I G N A CORP	1982	2005	-	-	51	Holding and other investment offices
C I T FINANCIAL CORP	1938	1976	62	198	-	Nondepository credit institutions
C P C INTERNATIONAL INC	1936	1999	63	74	215	Food mfg
CHASE MANHATTAN CORP	1972	2005	-	-	67	Depository institutions
CHESAPEAKE & OHIO RAILWAY CO	1938	2005	19	-	149	Transportation
CHRYSLER CORP	1936	1997	21	10	29	Motor vehicles
CITICORP	1971	1997	-	-	20	Depository institutions
CITIES SERVICE CO	1939	1981	-	50	-	Petroleum mfg
COCA COLA CO	1936	2005	10	104	114	Food mfg
COMMONWEALTH EDISON CO	1938	1999	14	110	236	Electric, Gas, Sanitary
CONAGRA INC	1972	2004	-	-	46	Food mfg
CONSOLIDATED EDISON CO NY INC	1938	2005	28	79	217	Electric, Gas, Sanitary
CONTINENTAL CAN INC	1936	1983	68	41	-	Fabricated metal products
DAYTON HUDSON CORP	1970	2005	-	-	64	General merchandise stores
DETROIT EDISON CO	1938	2005	52	181	331	Electric, Gas, Sanitary
DIGITAL EQUIPMENT CORP	1971	1997	-	-	75	Industrial machinery
DOW CHEMICAL CO	1936	2005	45	60	45	Chemical mfg
DU PONT E I DE NEMOURS & CO	1937	2005	3	16	18	Chemical mfg
EASTMAN KODAK CO	1936	2005	18	54	49	Instruments
ENRON CORP	1970	2000	-	-	71	Electric, Gas, Sanitary
FIRESTONE TIRE & RUBBER CO	1936	1987	162	35	-	Rubber
FORD MOTOR CO DEL	1955	2005	-	5	4	Motor vehicles
GENERAL DYNAMICS CORP	1951	2005	-	18	117	Motor vehicles
GENERAL ELECTRIC CO	1942	2005	4	6	9	Electronic equipment
GENERAL FOODS CORP	1937	1984	39	40	-	Food mfg
GENERAL MOTORS CORP	1936	2005	2	1	2	Motor vehicles
GENERAL TEL & ELECTRS CORP	1941	2005	277	37	50	Communications
GEORGIA PACIFIC CORP	1951	2004	-	220	79	Lumber/wood mfg
GOODYEAR TIRE & RUBR CO	1936	2005	185	27	99	Rubber
GULF OIL CORP	1946	1982	-	12	-	Petroleum mfg
HEWLETT PACKARD CO	1970	2005	-	-	70	Instruments
INLAND STEEL CO	1936	2005	49	69	290	Primary metals
INTERNATIONAL BUSINESS MACHS COR	1936	2005	50	32	5	Industrial machinery
INTERNATIONAL HARVESTER CO	1936	2003	35	23	292	Industrial machinery
INTERNATIONAL PAPER CO	1936	2005	191	47	74	Paper
INTERNATIONAL TEL & TELEG CORP	1936	2005	326	61	42	Electronic equipment
KENNECOTT COPPER CORP	1936	1979	12	106	-	Primary metals
KRESGE S S CO	1936	2005	56	126	25	General merchandise stores
KROGER COMPANY	1970	2005	126	20	44	Food stores
LIGGETT & MYERS TOB CO	1937	1989	37	161	777	Tobacco mfg
LOCKHEED AIRCRAFT CORP	1936	2005	187	33	120	Motor vehicles
MCDONNELL DOUGLAS CORP	1936	1996	168	39	58	Motor vehicles
MINNESOTA MINING & MFG CO	1950	2005	-	94	73	Paper
MONTGOMERY WARD & CO	1936	1975	40	-	-	General merchandise stores
NATIONAL DAIRY PRODS CORP	1936	1987	86	24	-	Food mfg
NORFOLK & WESTERN RAILWAY CO	1938	2005	23	-	412	Transportation
OCCIDENTAL PETROLEUM CORP	1970	2005	-	-	40	Oil and gas extraction
OWENS ILLINOIS GLASS CO	1936	1985	60	88	-	Stone, clay, glass, concrete
PACIFIC GAS & ELEC CO	1938	2005	44	80	126	Electric, gas, sanitary
PACIFIC TELEPHONE & TELEG CO	1938	1980	33	-	-	Communications
PENNEY J C CO INC	1936	2005	30	30	55	Apparel and accessory stores
PENNSYLVANIA RAILROAD CO	1939	2004	22	-	473	Transportation
PEPSICO INC	1936	2005	198	274	53	Food stores
PHELPS DODGE CORP	1937	2005	42	177	400	Primary metals
PHILIP MORRIS INC	1936	2005	97	153	17	Tobacco mfg
PHILLIPS PETROLEUM CO	1936	2005	41	36	68	Petroleum mfg
PROCTER & GAMBLE CO	1936	2004	15	31	37	Chemical mfg
RADIO CORP AMER	1936	1984	102	29	-	Electronic equipment
REPUBLIC STEEL CORP	1936	1986	59	44	202	Primary metals
REYNOLDS R J TOBACCO CO	1936	1999	24	62	64*	Tobacco mfg
ROCKWELL INTERNATIONAL CORP	1940	2005	155	52	81	Motor vehicles
SAFEWAY STORES INC	1937	2005	196	13	62	Food stores
SALOMON INC	1970	1996	-	308	21	Primary metals
SEARS ROEBUCK & CO	1970	2004	9	7	11	General merchandise stores
SHELL OIL CO	1936	1984	47	21	-	Petroleum mfg
SINCLAIR OIL CORP	1936	1967	89	34	-	Petroleum mfg
SOCONY VACUUM OIL INC	1936	1998	27	9	8	Petroleum mfg
SPERRY RAND CORP	1941	2005	492	38	119	Industrial machinery
STANDARD OIL CO CALIFORNIA	1936	2005	29	25	19	Petroleum mfg
STANDARD OIL CO IND	1937	1997	13	17	30	Petroleum mfg
STANDARD OIL CO N J	1936	2005	5	2	3	Petroleum mfg
SWIFT & CO	1937	1984	57	14	-	Food mfg
TENNECO INC	1955	2005	-	91	65	Electric, gas, sanitary
TEXACO INC	1970	2000	8	11	17	Petroleum mfg
UNION CARBIDE CORP	1938	1999	6	28	64	Chemical mfg
UNITED AIRCRAFT CORP	1936	2005	79	49	41	Motor vehicles
UNITED FRUIT CO	1938	2005	38	166	270	Food mfg
UNITED STATES RUBBER CO	1936	1985	152	51	-	Rubber
UNITED STATES STEEL CORP	1941	2005	7	8	47	Primary metals
WAL MART STORES INC	1973	2005	-	-	24	General merchandise stores
WARNER LAMBERT CO	1936	2005	48	237	254	Chemical mfg
WESTINGHOUSE ELECTRIC CORP	1936	1999	26	19	76	Electronic equipment
WOOLWORTH F W CO	1938	2005	20	45	124	General merchandise stores
WRIGLEY WILLIAM JR CO	1936	2005	46	360	712	Food mfg

Note. Rank in 1940 is defined according to market value (based on all firms appearing in the CRSP database) and ranks in 1960 and 1990 are defined according to total sales (based on all firms appearing in the Compustat database). Company names refer to the name most frequently used throughout the entire time period. * indicates rank in 1991 instead of 1990 because the company was not in Compustat in 1990. Industry definitions are the modal 2-digit SIC code reported in CRSP.

Table A2: Distribution of Sampled Firms by Industry

Industry	Percent of Firms
Mining	0.9
Manufacturing: Food and kindred products	10.5
Manufacturing: Tobacco	4.0
Manufacturing: Lumber/wood products	0.8
Manufacturing: Paper and allied products	2.2
Manufacturing: Chemicals and allied products	7.0
Manufacturing: Petroleum and coal products	10.8
Manufacturing: Rubber and misc. plastics products	3.1
Manufacturing: Stone, clay, glass, concrete products	0.8
Manufacturing: Primary metal industries	8.6
Manufacturing: Fabricated metal products	2.0
Manufacturing: Industrial machinery and equipment	4.3
Manufacturing: Electronic equipment	4.8
Manufacturing: Transportation equipment: Motor vehicles and equipment	5.0
Manufacturing: Transportation equipment: Aircraft and parts	5.4
Manufacturing: Transportation equipment: Ship and boat building	1.0
Manufacturing: Instruments and related products	1.7
Transportation	2.7
Communications	2.3
Utilities	6.0
Wholesale trade	0.6
Retail trade: General merchandise stores	5.8
Retail trade: Food stores	2.6
Retail trade: Other retail	1.0
Finance, insurance and real estate	6.2

Note. Industry definitions are the modal 2-digit SIC code from CRSP.

Table A3 (part 1): Distribution of Firms by Size

Rank	1936-1939, Fraction of Firms	1940-1949, Fraction of Firms	1950-1959, Fraction of Firms	1960-1969, Fraction of Firms	1970-1979, Fraction of Firms	1980-1989, Fraction of Firms	1990-1999, Fraction of Firms	2000- 2005, Fraction of Firms
Market Value: Rank=50	.51	.54	.43	.41	.33	.34	.31	.30
Market Value: 50Rank=100	.22	.22	.27	.19	.17	.20	.14	.13
Market Value: 100Rank=200	.16	.13	.17	.23	.21	.20	.25	.13
Market Value: 200Rank=500	.09	.11	.12	.16	.21	.17	.20	.27
Market Value: 500Rank	.01	.00	.01	.01	.08	.08	.09	.17
Total Sales: Rank=50	-	-	.62	.53	.40	.39	.33	.26
Total Sales: 50Rank=100	-	-	.23	.25	.26	.27	.24	.16
Total Sales: 100Rank=200	-	-	.11	.14	.21	.19	.18	.24
Total Sales: 200Rank=500	-	-	.04	.07	.11	.12	.21	.21
Total Sales: 500Rank	-	-	0	.00	.03	.02	.04	.13

Note. Rankings by market value are based on all firms appearing in CRSP, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock markets. Rankings by sales are based on all firms appearing in Compustat, which does not have data prior to 1950.

Table A3 (part 2): Distribution of Firms by Size, Average Market Share

Group	1936-1939	1940-1949	1950-1959	1960-1969	1970-1979	1980-1989	1990-1999	2000- 2005
Entire Sample in S&P 500	.39	.51	.49	.42	.37	.30	.24	.23

Table A4: Stock Option Grants to CEOs by Firm Size (Median Value of Option Grants / Total Compensation)

Group	1980-1984, Our Sample	1980-1984, Hall-Liebman	1985-1989, Our Sample	1985-1989, Hall-Liebman	1990-1994, Our Sample	1990-1994, Hall-Liebman
Entire sample	.120	0	.220	.086	.238	.194
Same firms in both samples	.118	.101	.215	.204	.214	.266
By firm size:
Firm size: Rank=100	.139	.164	.230	.223	.282	.338
Firm size: 100Rank=200	.162	.101	.163	.213	.142	.201
Firm size: 200Rank=300	.125	0	.140	.076	.192	.283
Firm size: 300Rank=500	.074	0	.292	.051	.226	.196
Firm size: 500Rank	.046	0	.228	.012	.238	.112

Note: Our sample is based on the CEOs of the largest 50 firms in 1940, 1960, and 1990. The Hall and Liebman sample is based on CEOs in a random sample of 478 firms from Forbes's top 500 rankings (see Hall and Liebman 1998 for details). There are 45 firms that appear in both samples. Rankings by size are determined by market value based on all firms appearing in the CRSP database, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock markets. Total compensation is the sum of salaries, bonuses, long-term bonus payments, and the Black-Scholes value of stock option grants. Annual stock option grants in our sample are imputed for cases when only the cumulative number of options granted over a multi-year period is disclosed. See Appendix Section 2.3 for a description of this imputation procedure.

Table A5: Median Total Compensation, Weighted to Reflect Different Groups (Millions of $2000)

Year	Firm Rank =100: Ranked by market value, weighted by Pr(selected)	Firm Rank =100: Ranked by market value, weighted by 1/market share	Firm Rank =100: Ranked by sales, weighted by 1/sales	100Firm Rank=300: Ranked by market value, weighted by Pr(selected)	100Firm Rank=300: Ranked by market value, weighted by 1/market share	100Firm Rank=300: Ranked by sales, weighted by 1/sales
1936-1939	.908	.892	-	.539	.490	-
1940-1949	.758	.734	-	.712	.726	-
1950-1959	.817	.766	.787	.602	.596	.491
1960-1969	.887	.837	.841	.654	.661	.587
1970-1979	1.06	1.00	.958	.775	.776	.680
1980-1989	1.57	1.44	1.36	1.01	1.01	.827
1990-1999	3.29	3.06	2.68	1.91	1.95	1.92
2000-2005	7.33	6.58	5.62	3.65	3.40	3.95

Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. Total compensation is the sum of salaries, bonuses, long-term bonus payments, and the Black-Scholes value of stock option grants. The value of option grants is estimated from the relationship between firm size and the share of grants relative to total compensation in the Hall-Liebman data (see Appendix Sections 3.2 and 3.3 for details). The probability of selection is defined as the number of sampled firms in a size category (rank=50, 50rank=100, 100rank=200 and 200rank=300) relative to the total number of potential firms in that category.

Table A6: Pay-to-Performance Correlations Adjusting for Changes in Firm Size

Year	Average Percent Change, Dollar change in wealth for $1000 dollar change in firm market value (Jensen-Murphy)	Median Percent Change, Dollar change in wealth for $1000 dollar change in firm market value (Jensen-Murphy)	Percent Change at Median Firm Size, Dollar change in wealth for $1000 dollar change in firm market value (Jensen-Murphy)	Average Percent Change, Dollar change in wealth for a 1 percent increase in firm's rate of return (Equity at Stake)	Median Percent Change, Dollar change in wealth for a 1 percent increase in firm's rate of return (Equity at Stake)	Percent Change at Median Firm Size, Dollar change in wealth for a 1 percent increase in firm's rate of return (Equity at Stake)
1940 - 1949	-61.0	-68.0	-22.0	-58.6	-69.8	-28.7
1950 - 1959	94.4	71.1	172	206	144	125
1960 - 1969	50.2	51.3	32.3	29.8	34.8	34.8
1970 - 1979	-41.5	-39.7	-39.7	-46.1	-47.5	-51.9
1980 - 1989	52.5	52.4	16.4	55.6	63.9	68.2
1990 - 1999	252	245	245	211	154	154
2000 - 2005	2.8	-26.4	114	29.9	45.1	45.1

Note. The change in the pay-to-performance correlation for each firm is the percent change in simulated pay-to-performance correlations from the previous decade to the current decade. Simulated correlations for each firm are the fitted values from a regression including interactions of firm performance with a spline function of firm size (using five size categories). Simulated values for the previous decade are the coefficient estimates from the previous decade multiplied by an indicator variable for the firm's position in the previous decade's distribution of firm size. Estimates are based on median regressions estimated separately for each decade. Firm size is defined as average market value in the prior three years. The change in executive wealth is defined as the sum of total compensation and the revaluation of stock and stock option holdings. The year 1946 is excluded from all calculations; see footnote 42 for details.

Table A7: Decomposition of the Variance of Ln(Compensation) by Decade

Year	Fraction of Explained By: Average Firm Size in Year	Fraction of Explained By: Average Firm Size in Decade	Fraction of Explained By: Size - Firm Avg. - Year Avg.
1936 - 1939	0.000	0.237	0.007
1940 - 1949	0.000	0.085	0.000
1950 - 1959	0.008	0.196	0.002
1960 - 1969	0.005	0.215	0.016
1970 - 1979	0.011	0.199	0.010
1980 - 1989	0.083	0.114	0.022
1990 - 1999	0.125	0.189	0.011
2000 - 2005	0.004	0.329	0.016

Note. Based on a separate ANOVA regression for each decade. Each cell shows the sum of squared residuals explained by the variable named in the column divided by the total sum of squared residuals. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. Total compensation is the sum of salaries, bonuses, long-term bonus payments, and the Black-Scholes value of stock option grants. Firm size is measured by the firm's market value.

Figure A1

Fraction of Executives Granted Stock Options

Figure A1 Data

Note: Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Annual stock option grants are imputed for cases when only the cumulative number of options granted in a multi-year period is disclosed in proxy statements. See Appendix Section 2.3 for details of this imputation procedure.

Figure A2

Median Value of Total Compensation

Including and Excluding Imputed Stock Option Grants

Figure A2 Data

Note: Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Annual stock option grants are imputed for cases when only the cumulative number of options granted in a multi-year period is disclosed in proxy statements. See Appendix Section 2.3 for details of this imputation procedure.

Figure A3

Fraction of Executives Exercising Stock Options

Figure A3 Data

Note: Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Annual stock option exercises are imputed for cases when only the cumulative number of options exercised in a multi-year period is disclosed. See Appendix Section 2.3 for details of this imputation procedure.

Figure A4

Median Value of Salary & Bonus of CEOs

Figure A4 Data

Note: Our sample is based on the CEOs of the largest 50 firms in 1940, 1960, and 1990. The Hall and Liebman sample is based on the CEOs of a random sample of 478 firms from Forbes's top 500 rankings from 1980 to 1994 (see Hall and Liebman 1998 for details). The Forbes sample is based on the CEOs of the 500 largest corporations listed in the Forbes compensation surveys from 1970 to 1992. ExecuComp is based on the CEOs of the 500 largest publicly-traded corporations. Rankings by size are determined by market value based on all firms appearing in the CRSP database, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock markets. The measure of compensation is the sum of salaries and current bonuses (granted in cash and in stock).

Figure A5

Median Salary & Bonus Reweighted by Firm Size

Figure A5 Data

Note: Salary and bonus is defined as the amount received in salary + current bonuses in stock or cash. Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Firms receive a weight inversely proportional to their probability of being in our sample, where this probability is defined as the number of sampled firms in each firm's size category (rank=50, 50rank=100, 100rank=200 and 200rank=500) divided by the total number of firms in each category. Ranks are defined by market value based on all firms in CRSP. See Appendix Section 3.1 for details.

Figure A6

Median Value of Stock Option Grants to CEOs

Figure A6 Data

Note: Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Option grants are valued using the Black-Scholes formula. See the notes to Figure A4 for the source of each sample.

Figure A7

Median Total Compensation

Figure A7 Data

Note: Based on the three highest-paid executives in the largest 50 firms in 1940, 1960, and 1990. Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. The alternative option scenario weights the fraction of options in total compensation using the relationship between firm size and the share of grants relative to total compensation in the Hall-Liebman data (see Appendix Sections 3.2 and 3.3 for details). For the weighted level of compensation, each firm is assigned a weight inversely proportional to its probability of being in our sample, where the weights are scaled to be representative to the 300 largest publicly-traded firms in the economy.

Footnotes

* M.I.T. Sloan School of Management. [email protected]Return to Text

** Federal Reserve Board of Governors. [email protected]. We would like to thank George Baker, Edward Glaeser, Claudia Goldin, Caroline Hoxby, Lawrence Katz, and Robert Margo for their advice and encouragement throughout this project. Very helpful comments have also been received from Doug Elmendorf, Eric Hilt, Antoinette Schoar, Dan Sichel, and seminar participants at the NBER Summer Institute, AEA meetings, EHA meetings, and Rutgers University. We would also like to thank the staff at the Historical Collections and Danielle Barney of Baker Library for making the data collection possible and Brian Hall and Jeff Liebman for providing us with their data. Yoon Chang, Yao Huang, Michele McAteer, Timothy Schwuchow, James Sigel, and Athanasios Vorvis provided outstanding research assistance. We gratefully acknowledge financial support from the Economic History Association, the Multidisciplinary Program in Inequality & Social Policy at Harvard University, and the National Science Foundation's Dissertation Completion Fellowship. The views in this paper do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff. Return to Text

1. A few examples include Baker (1938), Roberts (1959), Lewellen (1968), Wattel (1978), and Murphy (1985). Return to Text

2. The optimal sensitivity of managerial wealth to firm performance may have increased in recent decades due to rising business risk (Inderst and Mueller 2006) or greater international competition (Cuñat and Guadalupe 2006) Return to Text

3. Corporations were required to disclose the compensation of top officers in 10-K reports starting in 1934, but many firms were reluctant to do so in the early years. By 1936 most of the firms included data on remuneration in these reports, and so we start our sample in that year. Return to Text

4. Studies that have used proxy statements to study executive pay (although over shorter time periods than our sample) include Roberts (1959), Lewellen (1968), Yermack (1995), and Hall and Liebman (1998). Return to Text

5. Not only do these documents report information on salaries, bonus payments, stock options, and stock holdings, but they also contain detailed descriptions of compensation plans that allow for consistent measurement of each component of pay over time. Return to Text

6. Firms enter the sample when they go public or when corporate records become available in the collection at the Baker Library of Harvard Business School (our main source of corporate reports). Companies exit the sample as they go bankrupt, become private, or are acquired by a foreign firm, among other reasons. Return to Text

7. Although we collected data on the five highest-paid officers in each firm whenever possible, corporate reports consistently listed only the three highest-paid officers prior to 1978. We limit our analysis to the top three officers in order to maintain a consistent group of individuals over time, but the results are robust to including the 4^th and 5^th highest-paid executives. Return to Text

8. Restricting the analysis to CEOs is useful for comparing our sample to previous research, which has mainly focused on chief executive officers. Because the term "CEO" was not frequently used until the 1970s, identifying who held this title is not always straightforward. Previous studies suggest that this person was most often the president of the company, so we identify the president as the chief executive where the CEO is not explicitly mentioned (Mace 1971). In cases where we observe neither a CEO nor a president, we identify the chairman of the board as the CEO (about 2 percent of the observations). Return to Text

9. Throughout the paper, real values are measured in year 2000 dollars using the Consumer Price Index. Return to Text

10. Piketty and Saez use income tax records to estimate shares of aggregate wage and salary income. One disadvantage of income tax data is that they only contain information on the gains from exercising options. We use the value of stock option grants, which reflects the value of pay at the time of the award more accurately, and are not affected by subsequent movements in the firm's share price or by the executive's decision when to exercise the options. Moreover, the vast majority of employee stock options during the 1950s and 1960s were taxed as capital gains, and so would not have been reported on income tax returns as wages and salaries. Rather, they would have appeared as capital gains, but only upon the sale of the stock that had been purchased when the option was exercised. Return to Text

11. Although it would be useful to separate salaries from current bonus payments, many firms reported only the sum of the two prior to 1992. In firms that did report these payments separately between 1947 and 1991 (about 20 percent of the sample in these years), the value of current bonus payments usually ranged between 20 and 45 percent of current pay, with no obvious trend. Therefore, grants of current bonuses do not appear to have followed the same upward trend as the use of long-term pay (discussed below). Return to Text

12. We measure bonuses as the amount received during the year rather than the amount awarded (to be paid in the future) for consistency, because Compustat and some earlier proxy statements do not report information on the value of bonuses awarded. Return to Text

13. The 1950s were not the first period when incentive compensation mechanisms were a part of managerial pay. Historical accounts suggest that both current and deferred forms of incentive compensation were almost negligible prior to WWI but became commonly used during the 1920s (Taussig and Barker 1925, Baker and Crum 1935, Baker 1938, Roberts 1959). With the onset of the Depression and large declines in firm profits, many bonus plans were abandoned or suspended (Baker 1938). Return to Text

14. The deferral period was generally around 5 years, although individual plans varied from 2 to 10 years. Return to Text

15. The popular press also highlighted the significance of options as a form of executive remuneration during this earlier period, with headlines such as "Option Opulence" (Wall Street Journal, Feb. 1 1955) and "Stock Options Popular" (New York Times , Mar. 26, 1958). Return to Text

16. There is little evidence in prior research on the use of employee stock options prior to the 1970s. Lewellen (1968) provides a notable exception for the period 1940 to 1963. Although he claims that stock options were a much more important share of executive pay than our data suggest, his method of valuing options is substantially different from ours and is likely biased upward. See Section 3.2 of the Appendix for details. Return to Text

17. The downturn in the market made the repricing of options a common practice during the 1970s. We exclude repriced options from our estimates of grants whenever it is possible to identify them. Return to Text

18. Regulation introduced in 1978 required firms to disclose the total amount of remuneration distributed or accrued in the form of securities or property, insurance benefits or reimbursement, and personal benefits. Perquisites and other personal benefits (above a minimum threshold) have been separately reported since 1993. However, the accuracy of data on perks is limited, and so most research has focused on whether a certain perk was offered rather than on its actual value (Rajan and Wulf 2006, Yermack 2006) Return to Text

19. We identify the CEO as the president of the company in firms where the title "CEO" is not used (see footnote 8). Results are similar if the chairman of the board is used instead. Return to Text

20. Board membership was constructed by matching the names of the executives in our data to a list of the board directors from Moody's Manual of Investments. Thus, the fraction of insiders in the board is probably underestimated since we lack information on grey directors. Return to Text

21. For example, Bertrand and Mullainathan (2001) find that executives in corporations with weak corporate governance are remunerated for lucky outcomes. Return to Text

22. Prior studies of executive pay relied on the gains from exercising options to value options prior to 1980, but these values are mechanically correlated with the market value of firms. Because we calculate the value of stock options granted using the Black-Scholes formula for the entire sample, our measures of total pay are not subject to this concern. Return to Text

23. We use the average across firms to represent aggregate market size because it fits easily into a variance decomposition framework. However, our results are robust to using other proxies for aggregate market size including the median market value in our sample, average and median market value in the largest 500 publicly-traded firms, and the S&P index. Return to Text

24. These results are in line with the effects reported by Gabaix and Landier (2007), who use a much larger sample of firms from ExecuComp from 1992 to 2004. Return to Text

25. These results also cannot be explained by an asymmetric response of pay to increases and decreases in firm size. When we interact average market size with a dummy variable indicating years of decline in aggregate market size, the estimated coefficient on the interaction term is zero in both sample periods and the coefficients on average firm size are unchanged. Return to Text

26. These results are based on an ANOVA decomposition for each sample period. The fraction of the variance explained by each independent variable is the sum of squared residuals explained by that variable relative to the total sum of squared residuals of ln(compensation). Return to Text

27. In Appendix Table A7, we show that the strong correlation between compensation and aggregate firm size was limited to the 1980s and 1990s. For all other decades in our sample, average market value accounts for less than 1 percent of the variation in executive pay. Return to Text

28. To further study the implications of tax policy for the correlation of the level of pay and firm size, we have also analyzed the relationship between after-tax compensation and size. While the after-tax correlation of pay with average market size is stronger for the 1945-1975 period than the correlation with pre-tax compensation, it is still markedly weaker than the relationship between pay and firm size in later decades. Return to Text

29. We could also consider firm earnings as a size proxy, but we lack data on this variable prior to the 1950s. Return to Text

30. Using Pesaran's (2007) panel unit root test, the null hypothesis of non-stationarity in the residuals of the second period has a p-value of 0.59. Therefore the presence of a unit root in the residuals cannot be ruled out. The p-value for the residuals in the early period is 0.03, suggesting that there may be a unit root in those residuals as well. Return to Text

31. Evidence from both Hall and Liebman's 1980-1994 and ExecuComp's 1992-2005 datasets confirms this result. Using the Hall-Liebman data, we find an elasticity of CEO pay with respect to average market value of 0.85 and the elasticity with respect to the idiosyncratic component of firm size of 0.32. The coefficients are -0.10 and 0.28 respectively for the specification in changes. Using all of the executives in ExecuComp, we find that the effect of average market value falls by half when the regression is estimated in changes instead of in levels. Return to Text

32. We are only aware of one study that measures pay-to-performance using a long-term series. Boschen and Smith (1995) provide estimates from 1948 to 1990, but their sample may not show the entire picture because it is based on only 16 firms and does not include executives' holdings of stock and stock options. Return to Text

33. Even though we consider a broader measure of changes in wealth than executive pay, we keep in line with the literature by referring to this correlation as pay-to-performance. Return to Text

34. We collect information on equity holdings after 1942 from proxy statements. From 1935 to 1941, we construct stock holdings from an initial SEC report on holdings in 1935 and bi-monthly reports on the equity transactions of each officer The use of transactions data introduces noise in our measure of stock holdings, but we do not find evidence of a large bias. See the Appendix Section 2.4 for further details. Return to Text

35. These results differ from Holderness, Kroszner and Sheehan (1999), who find higher stock ownership in 1995 than in 1935. There are two main explanations for this discrepancy. First, the increase in fractional holdings does not occur among the largest publicly-held firms in their sample, which are more comparable to our sample of firms. In addition, they focus on the holdings of all top officers and directors. When they restrict the sample to the top of the hierarchy, they find a similar decline in ownership: the holdings of the median CEO in their sample fell from 0.09 percent of shares outstanding in 1935 to 0.06 percent in 1995. Return to Text

36. A limitation of our data is the lack of information on forms of wealth and earnings that are not related to compensation, such as dividends, capital gains, and non-firm related wealth. Unless otherwise specified, we use the term "wealth" throughout the paper to refer to firm-related wealth. Return to Text

37. For a discussion of the statistics, see Jensen and Murphy (1990), Joskow and Rose (1994), Garen (1994), Hall and Liebman (1998), Murphy (1999), Aggarwall and Samwick (1999), and Baker and Hall (2004). Return to Text

38. Both these statistics give an empirical measure of the correlation between pay and firm performance. While a higher pay-to-performance correlation will likely influence managerial actions, it is not clear that this correlation is caused by firms' desire to provide incentives. Pay-to-performance correlations can also be the result of a bargaining or fairness model (Blanchflower, Oswald, and Sanfey 1996, Benjamin 2005). Although we cast our findings as incentives, we want to stress that we are only calculating a correlation. Return to Text

39. An additional benefit to calculating the elasticity is that it is not sensitive to changes in firm size, as are the other two measures we consider. Return to Text

40. This concern is less important for the other two measures of pay-to-performance because the correlation between changes in non-firm related wealth and firm performance is less likely to have changed over time. Return to Text

41. We ignore issues of repurchases of shares during the fiscal year, and use the rate of return to approximate the percentage change in firm value. Return to Text

42. The distribution of rates of return in our sample of firms is unusually low and highly skewed in 1946, possibly due to the end of war contracts. Therefore, we exclude this year from all regressions. When this year is included, the Jensen-Murphy statistic estimated over the 1944-1948 period falls from $0.44 to $0.24, and the value of equity at stake goes from $8,664 to $7,822. Therefore, our finding of an unusually low pay-to-performance correlation in the 1940s would only be strengthened by including 1946. Return to Text

43. For example, Aggarwall and Samwick (1999) find that OLS estimates of pay-performance sensitivities are between 2 to 7 times larger than those obtained from median regression. Return to Text

44. Alternatively, we computed a robust regression that uses Huber and biweight iterations to down-weight large outliers (the rreg command in Stata), and estimated an OLS regression after trimming the highest and lowest percentiles from the distribution of changes in wealth. These methods yielded similar results. Return to Text

45. Standard errors are bootstrapped, and account for correlation of observations within the firm. Return to Text

46. The estimates for the 1930s do not appear to be significantly different from the 1940s, and the 2000s may not be different from the 1990s. The larger standard errors in these decades may be due to smaller sample sizes in these periods. Extreme heteroskedasticity prevents estimation of the entire sample in one regression to directly test the significance of the changes in the coefficients over time. Return to Text

47. Our estimates of the value of equity at stake are consistent with those reported by Hall and Liebman (1998), but the Jensen-Murphy statistic is smaller. This discrepancy is partly due to larger firm size in our sample. Limiting our data to CEOs between 1993 and 1995, we obtain an estimate of $1.11 for a $1000 increase in firm value in firms among the top 100 of the S&P 500, $2.62 in firms ranked from 100 to 200, and $3.37 for the smallest firms in our sample. Hall and Liebman report a sensitivity of $5.29 for 1994, which is based on a random sample of about 500 of the largest firms between 1980 and 1994. Return to Text

48. The trends in pay-to-performance are similar for both CEOs and other top executives. Return to Text

49. Executives' wealth constraints and risk aversion are plausible explanations for the well-known negative correlation between the Jensen-Murphy statistic and firm size (Demsetz and Lehn 1985, Schaefer 1998). See Baker and Hall (1998) for further discussion of the value of equity at stake. Return to Text

50. The small sample size for the 2000-2005 period makes it difficult to tell whether this increase reflects a transitory spike in pay-to-performance or whether it will be long lasting. Return to Text

51. Jensen and Murphy (1990) interpret the low degree of pay-to-performance in the 1970s relative to the late 1930s as the result of political constraints following the increase in pay disclosure in 1942. The significantly higher correlations that we find in the 1950s and 1960s suggest that this was not the case. Return to Text

52. Table 8 shows that revaluations of stock and stock options account for virtually all of the relationship between wealth and performance. Therefore, we ignore changes in compensation for this exercise. Return to Text

53. Although the median percent increases in the 1970s and in the 1980s are about the same, the pattern is U-shaped from the early 1970s to the late 1980s. Thus, we find a steady increase in managerial incentives from the mid-1970s to the late 1990s, a result consistent with Hall and Liebman's 1980-1994 estimates. Return to Text

54. One explanation for this regime shift in pay-performance sensitivities could be an increase in the aggregate demand for top executives (Himmelberg and Hubbard 2000). Return to Text

55. Examples of these other possible factors include changes in the corporate governance of firms (Bebchuk and Fried 2004, Bertrand and Mullainathan 2001), tax advantages of certain instruments of pay (Hall and Liebman 2000), regulation (Rose and Wolfram 2000), and product market competition (Cuñat and Guadalupe 2006). Return to Text

56. Although we select firms based on rankings in three particular years, we intend to select companies that were large for a reasonable period of time. Therefore, we use the value sales to measure firm size whenever possible, since it is less susceptible to transitory shocks than market value. Return to Text

57. We find three firms that are listed in Fortune's ranking but do not appear in Compustat. See Kothari, Shanken and Sloan (1995) for a more detailed description of survivorship bias in Compustat. Return to Text

58. In 1951 (the first year with a reliably large number of firms reporting sales in Compustat), the correlation between a firm's rank by sales and its rank by market value is 0.76 (based on 423 firms). Thus, it is unlikely that the change in our selection criteria introduces a large bias in our sample. Return to Text

59. In accordance with SEC guidelines, the highest-paid officers are identified according to total cash remuneration (i.e. total cash and bonus payments, but not the value stock or stock option grants). Return to Text

60. We begin our sample in 1936 because this is the first year that provides us with a large enough sample size, as many firms refused to disclose information on pay in 1934 and 1935. Moreover, the collection of 10-Ks at Baker Library includes fewer companies in the earliest years of the SEC's operations. Due to the limitations of Baker Library's collection, we were able to find information pertaining to the 1936-42 period for 63 out of the 85 firms in our sample that were operating during those years. Return to Text

61. We assume 7 years instead of 10 to be consistent with prior work (for example, Hall and Liebman 1998). Return to Text

62. See Smith and Zimmerman (1976) and Murphy (1985) for further evidence that firms fix the exercise price equal to the current stock price. Return to Text

63. We are able to back out annual data for 11 percent of the cases where only multi-year totals are reported. Return to Text

64. For example, it is possible that many of the grants we attribute to the mid-1970s were actually granted in the late 1960s or early 1970s, which were times when firms were earning higher rates of return. Return to Text

65. Results are similar when we rank firms according to their sales. Return to Text

66. One potential worry is that our trends are biased by reflecting the compensation in firms that will become successful around 1940, 1960 and 1990. However, we do not find differential patterns when we split the firms into subsamples based on the year of selection into the sample, or when we restrict the data for each firm to the period after the year for which it was selected into the sample. Return to Text

67. Hall and Liebman (1998) expanded on a sample of 792 firms constructed by Yermack (1995). Return to Text

68. This difference can be partly explained by the larger size of the firms in our sample, but a small differential between the samples (about 10 to 15 percent) remains even after controlling for firm size in a regression framework. Return to Text

69. Using ExecuComp we find that the trend in salaries and bonuses in our sample is similar to a broader set of publicly-traded firms not just for CEOs but also for the three highest-paid executives. Return to Text

70. Results are similar when we use weights inversely proportional to a firm's market share. Return to Text

71. For example, in 1950 we have 38 firms ranked among the largest 50, so any firm in this category is given a weight of 50/38. Return to Text

72. We thank David Yermack for providing information on this topic. Return to Text

73. A potential concern is that investors did not have access to the Black-Scholes formula prior to 1973. However, this does not imply that investors did not have an understanding of derivative pricing. For example, Moore and Juh (2006) find that investors were able to determine the fair value of warrants traded in the Johannesburg Stock Exchange in the early twentieth century. Return to Text

74. The only exception is that the median percent change in the Jensen-Murphy statistic appears to be lower in the 2000s than in the 1990s, while it is higher for all the other statistics of pay-to-performance. Return to Text

75. The median change in pay-to-performance may not be representative of a typical firm since it may occur in a firm that is unusually large or unusually small for that decade. We prefer the average change over the change at the median firm size because the former uses information across the entire distribution of firm sizes, rather than information only at a single point. Return to Text

76. An alternative methodology would be to compare the pay-for-performance estimates in two successive decades using a subsample of firms of similar size. One problem with this method is that the type of firms that appear in the upper part of the distribution in one decade may be systematically different from small firms in the subsequent decade. Nevertheless, results are similar when we follow this strategy. Return to Text

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