Historical Trends in Executive Compensation 1936 - 2003

Soaring executive compensation during the past two decades has sparked an interest in CEO and other top management pay. We add a long-term perspective to this trend by constructing the first panel dataset to follow the compensation of top executives in large firms from 1936 to the present. The average real value of total compensation experienced three distinct phases: a sharp decline during World War II, a modest and gradual increase from the mid-1940s to the 1970s, and a high and accelerating growth rate in the 1980s and 1990s. The structure of executive pay has undergone a steady transformation during the past fifty years, as stock options and long-term incentive payments have become a larger share of compensation over time. To explain the trends in the level and structure of pay, we assess the contributions of tax policy and the growth in the market value of firms. We find that executives facing larger cuts in marginal income tax rates had larger reductions in stock option grants during the 1960s, revealing that tax policy influenced the composition of managerial pay. High income taxes also limited the total value of compensation by changing the correlation of pay with the market value of firms. Our simulation results suggest that, had taxes been at their low 2000 level throughout the past 60 years, compensation would have been 35 percent higher during the 1950s and 1960s. Hence, progressive taxation in the past restrained managerial compensation from keeping pace with the growing size of firms.