How Much Does Your Boss Make? The Effects of Salary Comparisons

Abstract

The vast majority of the pay inequality in an organization comes from differences in pay between employees and their bosses. But are employees aware of these pay disparities? Are employees demotivated by this inequality? To address these questions, we conducted a field experiment with a sample of 2,060 employees from a multibilliondollar corporation. We make use of the firm’s administrative records alongside survey data and information-provision experiments. First, we document large misperceptions among the employees about the salaries of their managers and smaller but still significant misperceptions of the salaries of their peers. Second, we show that these perceptions have a significant causal effect on the employees’ own behavior. When they find out that their managers earn more than they thought, employees work harder on average. We provide evidence that these effects are consistent with career-concerns models. In contrast, employees work less hard when they find out that their peers earn more. We conclude by discussing implications for pay inequality and pay transparency.