Do Firms Manage Pay Inequality ? (original) (raw)
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Corporate Income Inequality and Corporate Performance
Corporate Governance, 2011
Purpose – This paper seeks to make the case for new research into the perceived fairness and impact of executive pay. Design/methodology/approach – The paper reviews the literature regarding executive compensation and corporate performance and examines the evidence that a more egalitarian approach to pay could be justified in terms of long-term shareholder value. Findings – There would appear to be no evidence to suggest that the growing gap between the pay of executives and that of the average employee generates long-term enterprise value, and it may even be detrimental to firms, if not the liberal capitalist consensus on which the corporate licence to operate is based. Research limitations/implications – The paper outlines a new approach to tracking income differentials with corporate performance through the development of a corporate Gini coefficient ‘‘league table’’. Social implications – The proposed research is expected to point towards better practice in executive remuneration, and support the growing momentum for a sustainable and enlightened approach to business, in which the key goal is long-term enterprise value based on a fair distribution of the rewards of business. Originality/value – In producing a deeper understanding of the impact of widening income differentials, the paper should be of interest to senior executives in publicly quoted companies as well as press commentators, government officials and academics. Keywords Executive pay, Executive remuneration, Income inequality, Gini coefficient, Pay structures, Company performance Paper type Conceptual paper
Journal of Management Studies, 2002
Drawing on the literature on social comparison and equity theories, this paper analyses the determinants of, and the relationships between, the cash pay awards of CEOs and other board members for a sample of large UK companies over the period 1992-95. Our results suggest that external labour market and internal (i.e., within board) pay comparisons are important in explaining both CEO and other directors' pay awards. In the case of CEOs, however, there is evidence of an asymmetric adjustment to prior period pay anomalies, whereby the pay of the relatively underpaid executives displays significantly greater sensitivity to external market comparison pay levels. This asymmetric adjustment process results in a 'biddingup' of average CEO pay relative to other board members over the four year period investigated.
Firm performance and wages: Evidence from across the corporate hierarchy
2011
Does it matter whether you work for a successful company? And if so, does it matter who you are? To answer these questions we construct a unique panel dataset covering the pay of all CEOs, senior managers and a fully representative sample of workers for a large group of publicly-listed companies covering just under 90% of the market capitalization of the UK stock market. We show that senior management appear to have pay that is strongly associated with various measures of firm performance (such as shareholder returns and quasi-rents), while workers' pay is only weakly associated with such measures. A 10% increase in firm value is associated with an increase of 3% in CEO pay but only 0.2% in average workers' pay. Falls in firm performance are also followed by CEO pay cuts and significantly more CEO firings. This is essentially a result of the responsiveness of flexible pay to performance and only senior executives have a large enough share of pay in bonuses to generate a sizeable overall effect on pay. External control matters for pay -firms with lower levels of institutional ownership have smaller pay-performance elasticities for CEOs and do not cut their pay when performance is poor.
Exporting inequality: US investors and the Americanization of executive pay in the United Kingdom
Review of International Political Economy, 2021
Existing studies of the political determinants of top incomes and inequality tend to focus on developments within individual countries, neglecting the role of interdependencies that transcend national borders. This article argues that the sharp rises in top incomes observed in recent years are in part a product of specific features originating in the US political economy, which were subsequently exported to other economies through the global expansion of US-based financial investors. To test the argument, we collect fine-grained micro-level data on executive pay and firm ownership structures for a comprehensive sample of publicly listed firms in the United Kingdom (UK). Our analyses uncover robust evidence that the Americanization of UK firm ownership leads to the financialization of remuneration practices and sizeable pay increases for high-level managers at those firms. Scrutinizing the causal mechanisms underlying this effect, we find them to be more consistent with changes in bargaining power inside firms rather than coercion from outside or exogenous shifts in labor markets for executives. The findings show the disruptive potential of Wall Street investments abroad to empower local managerial elites to capture greater rents and, more generally, demonstrate the need to take the transnational seriously in order to understand patterns of inequality in the global political economy.
Performance pay and within-firm wage inequality
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This paper examines the impact of performance-related pay on wage differentials within firms. Our theoretical framework predicts that, compared to a fixed pay system, pay schemes based on individual output increase within-firm wage inequality, while group-based bonuses have minor effects on wage dispersion. Theory also predicts an interaction between performance-related pay and union bargaining, where union power reduces the impact of performance pay on wage dispersion. The empirical contribution utilizes two recent Norwegian employer surveys, linked to a full set of individual employee pay records. A longitudinal sub-sample allows for identification based on fixed establishment effects. Introduction of performance-related pay is shown to raise residual wage inequality in nonunion firms, but not in firms with high union density. Our findings suggest that even though performance-related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with strong unions.
LSE Research Online Documents on Economics, 2019
Existing studies of the political determinants of top incomes and inequality tend to focus on developments within individual countries, neglecting the role of potential interdependencies that transcend national borders. This article argues that the sharp rises in top incomes around the world in recent years are in part a product of specific features of the US political economy, which were subsequently exported to other economies through the global expansion of US-based financial investors. To test the argument, we collect fine-grained micro-level data on executive pay and firm ownership structures for a comprehensive sample of publicly listed firms in the United Kingdom (UK). Our analyses uncover robust evidence that the Americanization of UK firm ownership leads to sizable pay increases for high-level managers at those firms. Scrutinizing the causal mechanisms underlying this effect, we find them to be more consistent with changes in executive bargaining power than market-related f...
Changes in managerial pay structures 1986-1992 and rising returns to skill
Oxford Economic Papers, 2001
We examine the relationship between wages and skill requirements in a sample of over 50,000 managers in 39 companies between 1986 and 1992. The data include an unusually good measure of job requirements and skills that can proxy for human capital. We find that wage inequality increased both within and between firms from 1986 and 1992. Higher returns to our measure of skill accounts for most of the increasing inequality within firms. At the same time, our measure of skill does not explain much of the cross-sectional variance in average wages between employers, and changes in returns to skill do not explain any of the time series increase in betweenfirm variance over time. Finally, we find only weak evidence of any declines in the rigidity of internal wage structures of large employers.
Technological change and the growing inequality in managerial compensation
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Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production,(2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth.