Pay Harmony: Peer Comparison and Executive Compensation

61 Pages Posted: 26 Apr 2013 Last revised: 3 Jun 2013

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2013

Abstract

Do horizontal wage comparisons affect firm policies on executive pay? This paper explores that question using a 1992 SEC proxy disclosure rule that mandated increased disclosure of executive pay. We argue that this rule differentially increased wage comparisons within firms with geographically-dispersed managers — firms with the greatest information frictions prior to the rule change. We report three changes related to compensation after 1992 for division managers. First, within firms with dispersed managers, division manager pay co-moves more with peer pay and is less sensitive to individual performance. Second, pay disparity between managers located in different states decreases relative to that of co-located managers. Third, division productivity falls in dispersed firms, with the effect driven by managers at the low end of the wage distribution. Taken together, our findings suggest that principals account for horizontal peer comparison when designing executive wage contracts and that this comparison has productivity consequences for firms.

Keywords: peer comparison, executive compensation, pay-for-performance, internal labor markets, behavioral economics, pay disclosure

JEL Classification: J33, J44, M12, M52

Suggested Citation

Gartenberg, Claudine Madras and Wulf, Julie M., Pay Harmony: Peer Comparison and Executive Compensation (May 31, 2013). Available at SSRN: https://ssrn.com/abstract=2256704 or http://dx.doi.org/10.2139/ssrn.2256704

Claudine Madras Gartenberg

Wharton ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
2158987755 (Phone)

Julie M. Wulf (Contact Author)

Harvard Business School ( email )

Harvard Business School
Boston, MA
United States

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