Workplace Inequality in Pay Growth: Evidence from US Individual-level Data

Abstract

Using granular, individual-level compensation data for US publicly traded firms, 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 corporate governance is weakened. Our evidence suggests that managerial rent extraction is an important driver of the within-firm pay growth inequality.

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

JEL Classification: G30, G34, J31