Drawing from a dynamic principal-agent model characterized by a state variable given by the agent’s initial bargaining power and by a law of motion that governs the changes of their bargaining power, we introduce a fat tail distribution for the productivity possibilities in order to study heterogeneity in CEO compensations by analysing firm and industry-level characteristics. Through a numerical exercise, we find that the productivity possibilities determine CEOs’ compensation size and distribution, but once this is determined, the bargaining dynamics within the firm shape the evolution of this compensation. We also present evidence that our model can describe to a good extent compensation behaviours observed in data