Inequality, Mobility, and Economic Growth

• Absolute Mobility and Income Share: Discussion around the work of Kenny and Rusty indicates that absolute mobility is inversely related to income share.

  • This implies a potential correlation where increasing income shares for the wealthiest individuals correspond with a decline in overall mobility for the rest of the population.

  • Causality vs. Correlation: Important to note that correlation does not imply causation; thus, the question arises whether rising top incomes harm or help economic growth.

  • Rising top incomes may create economic growth, while also possibly narrowing opportunities for the bottom 90%.

The Dregs Paper and Executive Compensation

• Defending the One Percent: The paper “The Dregs” critiques the justifications provided for the level of inequality, defending market mechanisms as the rationale for high executive compensation.

  • Discussion centers on the role of the one percent in capturing economic growth without necessarily contributing to overall quality of life improvements.

  • Focus on CEO Compensation: CEOs constitute a significant portion of the one percent, making compensation levels particularly noteworthy.

  • As of the document, CEO compensation is reported to be approximately 335 times that of the average U.S. worker.

Efficiency of Resource Allocation

• Resource Allocation Questions: Are shareholders effectively compensating CEOs according to market efficiencies? Does the general public benefit from such high compensation?

  • Some argue that high compensation results from market strategies to attract top talent, while others suggest it leads to unequal profits from firms or governance issues.

Peer Benchmarking and Compensation Structure

• Benchmarking Process: Introduced as a method for setting CEO compensation based on comparisons within a chosen peer group.

  • Result of SEC mandates starting in 2006 requires firms to disclose compensation practices and peer groups.

  • Increased transparency is theorized to allow shareholders to better scrutinize executive compensation, potentially correcting compensation discrepancies.

Competing Predictions Regarding Peer Benchmarking

• Transparency vs. Bias: Peer benchmarking is posited to increase transparency; however, an alternative prediction suggests it legitimizes and reinforces above-market pay.

  • Questions arise regarding how bias manifests in the benchmarking process.

Theoretical Foundations

• Diversity Predictions: The hypothesis states that accurate selection of peers allows for fair evaluations of CEO compensation.

  • Contrast noted with instructional incoherence in peer group selection, indicating that certain industries may lack clarity on effective peer comparisons leading to bias.

Incentives and Bias in Compensation

• CEOs’ Interests in Benchmarking: CEOs may resist honest peer group evaluation to maintain the perception of superior performance.

  • Compensation committees may prioritize bias due to selected peer group's influence on their decision.

Search for Bias Indicators

• Identifying Upward Bias: Investigation surrounding higher compensation levels and structured environments that lead to bias, specifically evaluating firms with larger, well-compensated CEO groups.

• Consequential Biases: Proposed that these biases lead to a ratcheting effect where varying compensation standards impact broader market perceptions.

Research Literature on Compensation Peer Groups

• Review of Related Research: Some papers argue in favor of peer group influences, while others highlight biases in peer compensation evaluation.

  • Counterfactual Analysis: Some researchers conduct studies comparing pay across diverse peer groups for detecting bias.

Structural Ambiguity

• Concept Definition: The variation in median pay across different peer groups creates structures that lead to ambiguity and the possibility of bias.

  • Peer Group Constraint: Refers to the number of firms within selected peer groups and their influence on compensation decisions.

Data Collection and Peer Pay Gap Measurement

• Dataset Creation: Collection of data from various databases covering extensive CEO pay data over several years to establish trends.

• Peer Pay Gap (PPG): Defined as the ratio of average pay within the named peer group to a counterfactual peer group, indicating the presence of bias in peer selections.

Findings on CEO Compensation Trends

• Graphs and Trends: Measurement of structural ambiguity and peer group constraint influence on bias indicates possible areas of over-compensation among CEOs.

  • Pay Structure Observations: Results show that specific pay inequities persist even as transparency of peer groups increases.

Implications of Findings

• Effect of Transparency: Over time, there is evidence that increased scrutiny leads to a lowering of bias in compensation, but persistent biases are still observable.

  • The discussion anticipates that normative peer-based compensations could narrow pay gaps between CEOs and average workers.

• Historical Comparisons: Insights from historical perspectives indicate that marginal tax rates influence executive compensation levels, referencing data from past decades where high rates correlated with lower executive pay.

  • Suggestion that creating effective means of correcting executive compensation could lead to more equitable structures in workplace environments.