Within-Firm Pay Inequality

By Holger M. Mueller, P. Ouimet, Elena Simintzi. 2017

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Financial regulators and investors alike have expressed concerns about high pay inequality within firms. This study examines how within-firm pay inequality varies across firms, how it relates to firms’ operating performance and valuations, and whether it is priced by the market. Using a proprietary data set of public and private firms in the UK, we find that pay disparities between top-level jobs – those where managerial skills and responsibility are most important – and bottom-level jobs are increasing in firm size. By contrast, pay differentials between jobs involving either no or only little managerial responsibility are invariant to firm size. Moreover, firms with higher within-firm pay inequality have better operating performance, higher Tobin’s Q, and higher equity returns. Our results support the notion that high pay disparities within firms are a reflection of better managerial talent.

View Paper: https://www.semanticscholar.org/paper/e7ad5b5752bfd9c03e8269b841f7c86cfb08c11a