Pay Harmony: Peer Comparison and Executive Compensation
Claudine Madras Gartenberg
New York University (NYU) - Leonard N. Stern School of Business
Harvard Business School
March 26, 2014
Harvard Business School Strategy Unit Working Paper No. 13-041
This study suggests that peer comparison affects both wage setting and productivity within firms. We report three changes in division manager compensation following a 1991-1992 controversy over executive pay. We argue that this controversy increased wage comparisons within firms, particularly those with geographically-dispersed managers – managers with the greatest information frictions. Following the controversy, pay in dispersed firms co-moves more and is less sensitive to individual performance. Relatedly, pay disparity between managers located in different states decreases relative to that of co-located managers. Finally, division productivity falls in dispersed firms, particularly among managers at the low end of the wage distribution.
Number of Pages in PDF File: 62
Keywords: Executive Compensation, Pay-for-Performance, Internal Labor Markets, Peer Comparison, Firm Geography
JEL Classification: J33, J44, M12, M52
Date posted: April 3, 2014
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