Workplace Inequality in the U.S. and Managerial Rent Extraction: Evidence from Pay Growth Gaps

65 Pages Posted: 21 Aug 2020 Last revised: 29 Jun 2022

See all articles by Jie He

Jie He

University of Georgia - Department of Finance

Lei Li

Board of Governors of the Federal Reserve System

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: May 25, 2022

Abstract

Using granular, individual-level compensation data, we study the escalating US workplace inequality by examining the within-firm difference in pay growth between executives and non-executive employees (i.e., “pay growth gap”). We document a large pay growth gap that increases in not only a firm’s idiosyncratic stock return, but also its systematic stock return. Importantly, there is a strong asymmetry in pay growth gaps: Executives, relative to employees, are rewarded for good idiosyncratic stock performance but not penalized as much for bad performance. This asymmetry becomes more pronounced when corporate governance is weaker, and further analyses support managerial rent extraction as a possible explanation. Unlike existing literature that mostly rationalizes the dramatic workplace pay inequality in an optimal contracting framework, our findings indicate that managerial rent extraction also plays an important role in the tremendous surge in such inequality.

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

JEL Classification: G30, G34, J31

Suggested Citation

He, Jie and Li, Lei and Shu, Tao, Workplace Inequality in the U.S. and Managerial Rent Extraction: Evidence from Pay Growth Gaps (May 25, 2022). European Corporate Governance Institute – Finance Working Paper No. 834/2022, Available at SSRN: https://ssrn.com/abstract=3662425 or http://dx.doi.org/10.2139/ssrn.3662425

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Lei Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Tao Shu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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