CEO Compensation and Information Technology

CEO compensation has increased dramatically in the last few decades, drawing increasing scrutiny from policy-makers, researchers, and the broader public. We find that IT (information technology) intensity strongly predicts compensation of CEO and other top executives. Our examination of panel data from 2507 publicly traded firms over 15 years controls for other types of capital, number of employees, market capitalization, median worker wages, industry turbulence, firm or industry fixed effects, and other factors. Our interpretation of this finding builds on earlier work which found a correlation between CEO pay and firm size. We hypothesize that IT increases the information available to the top executives for decision-making, magnifies their ability to propagate instructions throughout the firm, and improves the monitoring and enforcement of those instructions. When a CEO’s instructions are implemented with higher fidelity, the fortunes of the firm will more closely mirror her performance. From the perspective of the CEO, this increases “effective size” of the firm that she controls. In turn, in an efficient market, this will increase overall CEO compensation.