Pay Harmony? Peer Comparison and Performance Compensation in Multi-Business Firms
Claudine Madras Gartenberg
New York University (NYU) - Leonard N. Stern School of Business
Harvard Business School
March 22, 2016
Harvard Business School Strategy Unit Working Paper No. 13-041
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
Date posted: April 3, 2014 ; Last revised: April 29, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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