The Rise in CEO Compensations and the Evolution of Ownership Structure

From the 1980s in the US and later on in other industrialized countries, inequalities started to widen because of increasing revenues at the top of the distribution. Contrary to preceding periods of rising inequalities in history, these inequalities have mainly been due to rising working income, not only to incomes from assets. The financial sector accounts for a significant portion of the top percentile of working incomes, followed by some occupations among which we find CEOs. In my study based on a panel of 123 French listed firms between 2003 and 2012, I intend to explain the evolution of CEO compensation during the 2000s with the evolution of the ownership structure and the consecutive financialization of the firms. The development of financial markets in France came along with the protection of small investors and rules of “good governance” intended to give more controlling power to financial minority stakeholders. Descriptive statistics from the panel used in this study confirms that variable compensation in the form of bonuses represented a higher portion of cash compensation as transparency about the compensation packages was made compulsory. Also, I establish a typology of the controlling shareholders according to their time horizon and their identity. I find that short-term investors, mostly investment companies, provide more incentives to their CEOs and that variable components of compensation do not substitute for base salaries but come in addition, resulting in higher total compensation. When looking at the evolution of the ownership structure during the period 2003 and 2012, investment companies are the unique category of controlling shareholders that increased the portion of firms they control on the sample. Regression of the evolution of CEO compensation on the evolution of ownership show that changes in controlling shareholders significantly contribute to explain changes in CEO compensation. Among companies that remained controlled, CEO compensation rose more significantly than in companies that remained diffusely held, in terms of base salary and of ratio of bonus. The increase in the level of compensation may be interpreted as a lower involvement of financialized controlling shareholders who delegate more power to their CEOs and provide them with higher salaries. As regards the higher ratio of bonus, I interpret this finding as a catching up of governance practices in companies that were controlled at the beginning of the period as compared to non-controlled companies; the latter had earlier pressure from their investors to comply with “good governance” rules and a higher ratio of performance-related compensation. Some preliminary results also suggest that the rise of institutional investors as minority shareholders, and specifically foreign institutional investors, may also explain the catching up. Eventually, controlling shareholders with shorter time horizons and with portfolio strategies (investment companies), the rising shares held by institutional investors in the free float, along with governance practices that evolved with the financialization of ownership, are found to contribute to explain the evolutions of CEO compensations.