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Lucian Bebchuk, Martijn Cremers & Urs Peyer, Pay Distribution in the Top Executive Team (Harv. L. Sch. John M. Olin Ctr. Discussion Paper No. 574, Dec. 2006).

Abstract: We investigate the distribution of pay in the top executive team in public companies. In particular, we study the CEO's pay slice (CPS), defined as the fraction of the aggregate top-five total compensation paid to the CEO. A firm's CPS might reflect the relative significance of the CEO – in terms of ability, contribution to the firm, or power – relative to other members of the top executive team. We find that CPS has been going up over the past decade. During this period, CEOs have increased their fraction of both equity-based compensation and non-equity compensation. The level of CPS is associated with various characteristics of the top team and the firm’s governance arrangements. Among other things, CPS is high when the CEO has long tenure; when the CEO chairs the board; when few other executives are members of the board; and when the firm has more entrenching provisions. High CPS is associated with lower firm value as measured by Tobin's Q. Using a simultaneous equations approach yields findings consistent with the possibility that this negative correlation is at least partly due to high CPS, or the factors that it reflects, bringing about a lower Tobin's Q. High CPS is also associated with a reduction in the sensitivity of CEO turnover to performance. This is the case especially in firms with high entrenchment levels. Overall, our results indicate that the distribution of compensation in the top executive team is an aspect of pay arrangements and corporate governance that is worthy of financial economists' attention.