Pay harmony
Subtitle: peer comparison and executive compensation
By: Claudine Gartenberg, Julie Wulf
Contributors: Wulf, Julie, 1956-; Harvard Business School
Series: Working paper / Harvard Business School -- 13-041; Working paper (Harvard Business School) -- 13-041
Publisher: Harvard Business School
Published: 2012
Place of publication: Boston ]
Language: eng
Number of pages: 57
Description: Using rich panel data on division manager pay, we investigate whether peer effects in the form of horizontal wage comparisons affect firm policies on executive pay. We find pay co-movement (or pay-referent sensitivity, PRS) to be more pronounced in geographically concentrated firms where we expect divisional proximity to facilitate information sharing about pay and magnify peer comparisons. To separate the peer effect of PRS from other factors that may drive co-movement of firm pay, we exploit exogenous increases in access to pay information using the SEC 1992 Proxy Disclosure Rule that differentially affected firms. Based on differences-in-differences models, we find increased PRS and decreased pay-performance sensitivity (PPS) after 1992 within geographically dispersed firms relative to firms with proximate divisions. The effects are strongest in dispersed firms with relatively less pay disclosure prior to 1992, a subsample for which the ruling had a relatively larger impact. Finally, based on analysis of manager pairs within a firm, we find that mean distance in pay between different-state managers increased by less relative to same-state managers after the rule change. Taken together, our findings suggest that peer comparison decreases pay disparity within firms and that principals face a tradeoff between the incentive effects of performance-based pay and costs of peer comparison.
Notes: November 2012" -- Publisher's website.

Includes bibliographical references (pages 49-52).