This paper presents a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. The model finds a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. The model shows that the recent rise in CEO compensation may be an efficient equilibrium response to the increase in the market value of firms, rather than resulting from agency issues. The model also sheds light on cross-country and cross-industry differences in compensation. It predicts that countries experiencing a lower rise in firm value than the US should also have experienced lower executive compensation growth, which is consistent with European evidence. The model demonstrates that a large fraction in cross-country differences in the level of CEO compensation can be explained by differences in firm size. The paper offers a calibration of the model, which could be useful to guide future quantitative models of corporate finance. The main surprise is that the dispersion of CEO talent distribution appeared to be extremely small at the top. If we rank CEOs by talent, and replace the top CEO by CEO number 250, the value of his firm will decrease by only 0.016%. However, these very small talent differences translate into considerable compensation differentials, as they are magnified by firm size. The same calibration delivers that CEO number 1 is paid over 500% more than CEO number 250. The rise in executive compensation has triggered a large amount of public controversy and academic research. The paper compares its theory with three types of economic arguments that have been proposed to explain this phenomenon. The first explanation attributes the increase in CEO compensation to the widespread adoption of compensation packages with high-powered incentives since the late 1980s. The second explanation attributes the rise to an increase in managerial entrenchment. The third explanation attributes the increase to changes in the nature of the CEO job. The paper proposes a simple competitive model of CEO compensation. It is tractable and calibratable. CEOs have different levels of managerial talent and are matched to firms competitively. The marginal impact of a CEO’s talent is assumed to increase with the value of the firm under his control. The model generates testable predictions about CEO pay across firms, over time, and between countries. Moreover, the model demonstrates that the recent rise in CEO compensation may be an efficient equilibrium response to the increaseThis paper presents a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. The model finds a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. The model shows that the recent rise in CEO compensation may be an efficient equilibrium response to the increase in the market value of firms, rather than resulting from agency issues. The model also sheds light on cross-country and cross-industry differences in compensation. It predicts that countries experiencing a lower rise in firm value than the US should also have experienced lower executive compensation growth, which is consistent with European evidence. The model demonstrates that a large fraction in cross-country differences in the level of CEO compensation can be explained by differences in firm size. The paper offers a calibration of the model, which could be useful to guide future quantitative models of corporate finance. The main surprise is that the dispersion of CEO talent distribution appeared to be extremely small at the top. If we rank CEOs by talent, and replace the top CEO by CEO number 250, the value of his firm will decrease by only 0.016%. However, these very small talent differences translate into considerable compensation differentials, as they are magnified by firm size. The same calibration delivers that CEO number 1 is paid over 500% more than CEO number 250. The rise in executive compensation has triggered a large amount of public controversy and academic research. The paper compares its theory with three types of economic arguments that have been proposed to explain this phenomenon. The first explanation attributes the increase in CEO compensation to the widespread adoption of compensation packages with high-powered incentives since the late 1980s. The second explanation attributes the rise to an increase in managerial entrenchment. The third explanation attributes the increase to changes in the nature of the CEO job. The paper proposes a simple competitive model of CEO compensation. It is tractable and calibratable. CEOs have different levels of managerial talent and are matched to firms competitively. The marginal impact of a CEO’s talent is assumed to increase with the value of the firm under his control. The model generates testable predictions about CEO pay across firms, over time, and between countries. Moreover, the model demonstrates that the recent rise in CEO compensation may be an efficient equilibrium response to the increase