An institutional analysis of the growth of executive remuneration

Abstract

This article develops a framework for understanding growth in executive remuneration and its increasing divergence from average earnings since a 1980s turning point, drawing on studies from a range of countries but with a special focus on Australian evidence. This framework emphasises the central roles played by company size, to which power is intrinsically related; the distinct, asymmetric nature of the ‘bargaining’ relationship in executive labour markets; and institutions that reflect seven rules. A corporation’s status depends in part on its chief executive officer’s status and pay. Chief executive officers’ ability to extract rents is influenced by their social capital. Chief executive officer pay is heavily influenced by relative pay deprivation. Institutions emerge to facilitate dual-asymmetric pattern bargaining. The incentive structure of executive pay adjusts over time to minimise downside risk, justify high growth and deflect shareholder concerns. Different norms shape pay in different segments, though cross-segment references will be made to justify increases. Finally, chief executive officers’ ability to ratchet pay upwards is contested, leading to cycles of asymmetries reflecting the social, political and economic climate and balance of power.