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http://ssrn.com/abstract=2419099
 
 

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Pay Harmony? Peer Comparison and Performance Compensation in Multi-Business Firms


Claudine Madras Gartenberg


New York University (NYU) - Leonard N. Stern School of Business

Julie Wulf


Harvard Business School

March 22, 2016

Harvard Business School Strategy Unit Working Paper No. 13-041

Abstract:     
This study presents a series of pay patterns of senior employees within large firms. We interpret these patterns as reflecting the following factors influencing employee pay: incentive setting (pay for performance), vertical comparison to the CEO, and horizontal comparison among peers in “like” positions within the firm. These factors appear to interact: as horizontal pay co-movement increases, pay-for-performance decreases. Also, horizontal pay co-movement conforms to predictions from social psychology on referent selection: employees appear to compare more with peers that are geographically and socially proximate as well as against a manager’s highest-earning peer. Horizontal pay comparison within a firm also appears to be a strong anchor: we observe pay inequality increasing vertically between the CEO and employees as well as within the entire population of senior employees, but notably not across employees of the same firm over time. Taken together, our evidence supports the notion that agency and social factors co-determine pay within firms and that these factors interact with each other and with firm boundaries.

Number of Pages in PDF File: 43

Keywords: Executive Compensation, Pay-for-Performance, Internal Labor Markets, Peer Comparison, Firm Geography

JEL Classification: J33, J44, M12, M52


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Date posted: April 3, 2014 ; Last revised: April 29, 2016

Suggested Citation

Gartenberg, Claudine Madras and Wulf, Julie, Pay Harmony? Peer Comparison and Performance Compensation in Multi-Business Firms (March 22, 2016). Harvard Business School Strategy Unit Working Paper No. 13-041. Available at SSRN: http://ssrn.com/abstract=2419099 or http://dx.doi.org/10.2139/ssrn.2419099

Contact Information

Claudine Madras Gartenberg
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States

Julie M. Wulf (Contact Author)
Harvard Business School ( email )
Harvard Business School
Boston, MA
United States

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