CEO Compensation

This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research

The Effect of Uncertainty on Investment, Hiring, and R&D: Causal Evidence from Equity Options

There is wide debate over the impact of uncertainty on firm behavior, due to the difficulty both of measuring uncertainty and of identifying causality. This paper takes three steps that attempt to address these challenges. First, we develop an instrumental variables strategy that exploits firms' differential exposure to energy and currency prices and volatility. For example, airlines are negatively affected by high oil prices while oil refiners benefit from them, but both are sensitive to oil price volatility; retailers, in comparison, are not particularly sensitive to either the level or volatility of oil prices. Second, we use the expected volatility of stock prices as implied by equity options to obtain forward-looking measures of uncertainty over firms' business conditions. Finally, we examine how uncertainty affects a range of outcomes: capital investment, hiring, research and development, and advertising. We find that uncertainty depresses capital investment, hiring, and advertising, but encourages R&D spending. This perhaps-surprising result for R&D is consistent with a theoretical literature emphasizing that long investment lags create valuable real put options which offset the effects of call options lost when projects are started. Aggregating across our panel of Compustat firms, we find that rising uncertainty accounts for roughly a third of the fall in capital investment and hiring that occurred in 2008-10