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According to the book I'm reading (*), the pay of CEOs tends to increase because the divorce between ownership and control allows for abusive compensation practices by the CEOs. Indeed, in the graph below we can see a near exponential rise in CEO compensation (measured as the ratio between the wage of the CEO and that of the average worker) since the 70s. I've found many sources discussing this topic, but none on the decreasing spikes in the years 1994-95 and the early 2000s. Why did this happen?

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(*) Economics by Paul Samuelson, William Nordhaus, 19th Edition. Chapter 6, Figure 6-7.

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    $\begingroup$ "According to the book I'm reading" I don't understand why people are averse to naming their sources. It is necessary for the assessment of the graph. What companies were included? What country? What are the data sources? $\endgroup$
    – Giskard
    Commented Jun 29, 2023 at 9:15
  • $\begingroup$ I apologize. I've edited the post to include the book and chapter. The book points to a more specific source, but I went to that website and couldn't find the original graph. $\endgroup$
    – Guilherme Ferrão
    Commented Jun 29, 2023 at 9:32
  • $\begingroup$ Interestingly, there was an effort to rein in executive pay in the early-to-mid 1990s (propublica.org/article/the-executive-pay-cap-that-backfired). One thing that isn't mentioned in the ProPublica article is that the million-dollar cap quickly became a benchmark. CEOs that weren't getting that million bucks went to their boards and said "hey, every other company is paying that excess tax on their CEO salaries - what, you don't like me". Within two years after the cap was introduced, CEO salaries spiked. Sorry, can't find the article I read 30-ish years ago about this. $\endgroup$
    – Flydog57
    Commented Jun 29, 2023 at 23:15

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2001 was the time the dot-com bubble burst. CEOs and other highly ranked employees get most of their income from bonus payments, which are often tied to stock prices and revenues, and the like (which all suffered). 1994 was due to a weak stock market, and few executives exercised their options; hence, total compensation took a temporary dip. There was also a reform by the Clinton administration around this time, which was capping the tax deductibility of employee compensation. This will unlikely have had a major impact since the majority of CEO compensation is performance-based, which was exempt from the cap.

According to the Institue for Policy Stduies - A Decade of Executive Excess: The 1990s Sixth Annual Executive Compensation Survey September 1, 1999:

Of course, the biggest contributor to exorbitant CEO pay is stock options, which are variable. Indeed, when the stock market was weak in 1994, fewer executives exercised their options and total compensation took a dip. However, most executives still enjoy gen- erous base pay packages and in fact in 1994 a record number earned more than $1 million.

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It is probably due to the dot-com crash (stock markets fell and so did stock-related compensasion for CEOs). What I find odd about this graph is the trend during 2008 crisis. In fact, searching on internet, others sources show that CEOs compensation decreased consistently even during 2008 recession ( ex https://www.epi.org/publication/ceo-pay-in-2020/).

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