AT&T’s proposed acquisition of T-Mobile would make AT&T about a third bigger than it is now. Here’s my prediction about how this will play out if the deal goes through: within five years, the compensation of AT&T’s CEO will grow to be about a third bigger than it is now.There is a compelling reason why CEO compensation should increase with firm size: a CEO can add more value in a larger firm. This is a key element of Gabaix and Landier (2008), but it also appears in classical microeconomic models where wages are equal to the value of the marginal product of labor, which in turn (with a Cobb–Douglas production function, for example) increases in the amount of capital deployed. That’s an assumption of course, but a realistic and standard one.There's no especially compelling reason this should happen, but it will regardless.
Of course firms may still be too large and CEOs may be overpaid, and all this may be welfare decreasing. And the compensation of AT&T’s CEO may well grow to be more than a third bigger than it is now.