Power Laws, CEO Compensation, and Inequality

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Vaught, Dyanne Ashleigh
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CEO compensation, top incomes, and the net worth of the richest Americans have been increasing rapidly over the last thirty years. We hypothesize that the trends in CEO compensation have been caused by the same economy-wide factors that have contributed to increases in wealth and income. We test this hypothesis by using ExecuComp, Forbes 400, and IRS tax data to estimate power law distributions and compare the behavior of these distributions over time. Using the method of maximum likelihood, we estimate a power law distribution for each year observed for CEO compensation and net worth of the wealthiest Americans. Using linear regression techniques, we estimate a power law distribution for CEO compensation and individual income. We find that the Forbes 400 distribution changes little over time, while CEO compensation changes significantly. We find no evidence for the hypothesis that these two distributions move together. However, the parameters of income distribution and the distribution of CEO compensation are correlated; there is evidence that these distributions move together.
CEO, Pareto Distribution, Power Law, Forbes 400, Inequality, Income, Compensation