Empirical Determinants of Chief Political Officer Pay

Contrary to widespread assumptions, there is substantial variation, both across states and across time, in the salaries of politicians. In this paper, we examine the empirical determinants of Chief Political Officer (CPO) pay guided by the literature on executive compensation. Using data for 1950-94 for the US, and controlling for fixed effects, we find that gubernatorial wages respond to increases in state income per capita and taxes. The economic effects are large. Governors receive a 4.4 percent increase in pay for each ten percent increase in income per capita in their states and a 5% pay cut for each percentage point increase in income tax rates. We then test ‘pay for performance’ versus rent-extraction models of pay determination. The evidence suggests that the income elasticity is driven by rent extraction considerations, while the tax elasticity is governed by a (very primitive) pay for performance model. Lastly, we find document several patterns that suggest that that "democracy" plays a role in shaping CPO pay.