Executive Compensation, Fat Cats and Best Athletes

The growth in the skewness of the distribution of income in the US dates from the past decades when the remuneration to chief executive officers (CEOs) has increased faster than the growth in firm size. An explanation for this rapid increase is the contagion of changes in social norms which, through a process of social comparison, propagates higher pay among corporate executives. By analyzing this increase in pay as a diffusion process, this paper compares three candidate explanations for contagion: director board interlocks, peer groups, and educational networks. Through coupling a Generalized Estimating Equations (GEE) model to endogeneity tests, the results indicate that contagion is evident for all three kinds of networks, but only the peer comparison clearly survives the selection tests. These results support the argument of DiPrete, Eirich, and Pittinsky (2010) that remuneration policies that are anchored on peer group comparisons propagate the diffusion of higher pay among chief executive officers in the US, though only with weak evidence for a "leapfrog" effect. We show by an agent-based model that the process does not necessarily explode by an unsustainable aspirational bias because of the dampening of the contagion by CEO turnover and tenure effects. A key implication is that internet boom shifted upward the normative expectations of pay through social comparisons.