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

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 find that executive pay growth is three times as large as that of non-executive employees. This pay growth gap increases in not only a firm’s idiosyncratic stock return, but also its systematic stock return. Further, 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. However, there is no asymmetric relation between pay growth gaps and systematic stock performance. Unlike existing literature that mostly rationalizes 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