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. Further, compared to employee pay growth, executive pay growth is more sensitive to both the systematic and idiosyncratic components of a firm’s stock performance. However, there is a strong asymmetric relation between pay growth gaps and idiosyncratic stock performance: Executives, relative to employees, are rewarded for good firm-specific stock performance but not penalized as much for bad performance. This asymmetry does not manifest for the systematic component of stock performance. Consistent with managerial rent-extraction, the asymmetric relation between pay growth gaps and idiosyncratic performance becomes more pronounced when corporate governance is weaker.
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