Power, Policy, and the Compensation of Top Executives

This article contributes to the quantitative analysis of international differences in executive compensation with a novel emphasis on the role of political drivers—specifically, labor power, owner power, and executive power—while controlling for market factors. It leverages nested analysis, pairing a 2016 cross-sectional analysis of 179 firms in 20 countries with case studies of Finland, from 1971 to 2017, and the United States, from 1936 to 2016. The 2016 cross-sectional analysis of the world's largest firms finds market forces are important, but leave a large portion of international differences in top executive compensation unexplained. Also important are labor power and executive power. Similarly, while controlling for market forces, the longitudinal case studies of large firms in the US and Finland each find stronger labor power relative to executive power associated with lower executive pay. The theoretical framework advanced in this paper helps to explain why top CEO pay—and consequent top-end income inequality—are each extreme in certain countries and periods, and modest in others.