Using Global Shocks as a Laboratory to Study Executive Pay

Why It Matters

The findings reveal that CEO pay is driven more by firm scale, volatility, and executive experience than by luck, reshaping how boards should design compensation contracts.

Key Takeaways

• Global trade shocks raise firm value and CEO pay elasticity to 0.28.
• Large firms (>100 employees) see elasticity rise to 0.63, bonuses 2‑3× higher.
• Volatility from interactive shocks boosts CEOs' share of firm value.
• Experienced CEOs generate over 100‑times more value than their pay premium.
• Prior high salaries (AKM) predict pay but not performance during shocks.

Pulse Analysis

The debate over executive pay often pits "pay for luck" against merit‑based arguments. Critics point to widening gaps between CEO compensation and average worker wages, suggesting that leaders reap rewards from favorable market tailwinds they did not create. Proponents, however, argue that as firms expand globally, the talent needed to steer massive enterprises becomes increasingly valuable. This tension has intensified as globalization and supply‑chain disruptions have reshaped firm size distributions and market volatility, prompting scholars to seek natural experiments that isolate the true drivers of CEO remuneration.

In their recent paper, Hummels et al. (2026) exploit exogenous global‑trade shocks affecting Danish firms to untangle scale, volatility, and ability effects on pay. The study shows that export‑driven growth lifts firm value, translating into a 0.28 elasticity of CEO compensation to firm value—rising to 0.63 for firms with more than 100 employees, with bonuses reacting 2‑3 times more strongly. Contrary to standard principal‑agent theory, higher volatility from interactive shocks actually raises the share of firm value allocated to CEOs, especially in larger firms. When converting the reported firm‑value changes (e.g., a 1,000 DKK increase, roughly $140 USD) into compensation terms, the impact becomes starkly evident.

The most striking insight concerns executive ability. CEOs with greater prior experience generate sales and firm‑value gains that dwarf their additional pay, delivering a return exceeding 100 : 1 during large demand shocks. By contrast, CEOs identified by high historical salaries (the AKM fixed effect) receive a premium without measurable performance benefits. These results suggest boards should prioritize experience and shock‑handling capability when structuring contracts, rather than relying on past earnings as a proxy for talent. Policymakers and shareholders alike may need to rethink compensation guidelines to align incentives with the nuanced realities of a volatile, globalized economy.