Abstract
This study presents a series of pay patterns of senior employees within large firms. We interpret these patterns as reflecting the following factors influencing employee pay: incentive setting (pay for performance), vertical comparison to the CEO, and horizontal comparison among peers in “like” positions within the firm. These factors appear to interact: as horizontal pay co-movement increases, pay-for-performance decreases. Also, horizontal pay co-movement conforms to predictions from social psychology on referent selection: employees appear to compare more with peers that are geographically and socially proximate as well as against a manager’s highest-earning peer. Horizontal pay comparison within a firm also appears to be a strong anchor: we observe pay inequality increasing vertically between the CEO and employees as well as within the entire population of senior employees, but notably not across employees of the same firm over time. Taken together, our evidence supports the notion that agency and social factors co-determine pay within firms and that these factors interact with each other and with firm boundaries.
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