Peer Effects inside the Firm and the Diffusion of Excessive Managerial Pay

• In Event: 342 - Regular Session. Organizations: Network Comparisons and Economic Outcomes

Abstract

Using hand-collected data on divisional managers at S&P 1500 firms, we study how changes in one divisional manager’s compensation affect the compensation of other divisional managers inside the same conglomerate. Our identification exploits industry shocks to managerial pay in select divisions, such as the discovery of shale gas deposits. A pay increase for a manager affected by the industry shock generates large within-firm spillovers on the pay of other divisional managers, who receive pay raises of 54-87 cents for each dollar increase in the treated manager’s pay. These spillovers operate only within firm boundaries and are non-existent for the same industry pairs in stand-alone firms. The intra-firm convergence in executive pay is associated with weaker governance and lower firm value. Overall, our findings highlight how peer-effects within organizations contribute to the overall growth in wage inequality in the United States.

Authors

• Amir Goldberg, Stanford University

• Ran Duchin, University of Washington

• Denis Sosyura, University of Michigan