Share the Gain but Shun the Pain: Workplace Inequality in Pay Growth

Abstract

Using granular, individual-level compensation data, we study the within-firm difference in pay growth between executives and non-executive employees (i.e., “pay growth gap”). Our results reveal an asymmetric relation between a firm’s pay growth gap and the “skill” (idiosyncratic) component of its stock returns, suggesting that executives, relative to employees, are rewarded by high pay growth when firms perform well but not penalized as much by pay cuts when firms perform poorly. This asymmetric relation becomes more pronounced when firms have weaker corporate governance. Our evidence suggests that managerial rent extraction is an important driver of the within-firm pay growth inequality.

Keywords: employee pay growth, within-firm pay inequality, CEO-to-median-employee pay gap, corporate hierarchy, Longitudinal Employer-Household Dynamics database, managerial rent extraction

JEL Classification: G30, G34, J31