Finance Seminar with Kelly Shue, University of Chicago
The Department of Finance is proud to announce the upcoming seminar with Kelly Shue, Booth School of Business, University of Chicago
Kelly Shue will present:
Growth through Rigidity: The Rise in Executive Compensation
Kelly Shue, Booth School of Business, University of Chicago
Richard Townsend, Tuck School of Business, Dartmouth College
We explore a rigidity-based explanation of the dramatic and off-trend growth in US executive compensation during the 1990s and early 2000s. We show that executive option and stock grants are rigid in the number of shares granted. In addition, salary and bonus exhibit downward nominal rigidity. Rigidity implies that the value of executive pay will grow with firm equity returns, which averaged 30% annually during the Tech Boom. Rigidity also explains the increased dispersion in pay across firms, the difference in growth rates between the US and other countries, and the increased correlation between pay and firm-specific equity returns. Regulatory changes requiring the disclosure of the value of option grants help explain the moderation in executive pay in the late 2000s. Finally, we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and reference-dependent motivation, the same behavioral biases that may underlie downward nominal wage rigidity among rank and file workers.