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Firm Performance and Wages: Evidence from Across the Corporate Hierarchy

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  • Brian Bell
  • John Van Reenen

Abstract

Does it matter whether you work for a successful company? And if so, does it matter who you are? To answer these questions we construct a unique panel dataset covering the pay of all CEOs, senior managers and a fully representative sample of workers for a large group of publicly-listed companies covering just under 90% of the market capitalization of the UK stock market. We show that senior management appear to have pay that is strongly associated with various measures of firm performance (such as shareholder returns and quasi-rents), while workers' pay is only weakly associated with such measures. A 10% increase in firm value is associated with an increase of 3% in CEO pay but only 0.2% in average workers' pay. Falls in firm performance are also followed by CEO pay cuts and significantly more CEO firings. This is essentially a result of the responsiveness of flexible pay to performance and only senior executives have a large enough share of pay in bonuses to generate a sizeable overall effect on pay. External control matters for pay - firms with lower levels of institutional ownership have smaller pay-performance elasticities for CEOs and do not cut their pay when performance is poor.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1088.

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Date of creation: Nov 2011
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Handle: RePEc:cep:cepdps:dp1088

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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References

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  1. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2002. "Insurance within the firm," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data C3-1, International Conferences on Panel Data.
  2. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers, Society for Economic Dynamics 518, Society for Economic Dynamics.
  3. Elhanan Helpman & Oleg Itshoki & Stephen Redding, 2009. "Inequality and unemployment in a global economy," LSE Research Online Documents on Economics 25501, London School of Economics and Political Science, LSE Library.
  4. Mahmood Arai, 2003. "Wages, Profits, and Capital Intensity: Evidence from Matched Worker-Firm Data," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 21(3), pages 593-618, July.
  5. Cronqvist, Henrik & Heyman, Fredrik & Nilsson, Mattias & Svaleryd, Helena & Vlachos, Jonas, 2006. "Do Entrenched Manager Pay Their Workers More?," SIFR Research Report Series, Institute for Financial Research 47, Institute for Financial Research.
  6. Brian Bell & John Van Reenen, 2010. "Bankers' pay and extreme wage inequality in the UK," LSE Research Online Documents on Economics 28780, London School of Economics and Political Science, LSE Library.
  7. Van Reenen, John, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U.K. Companies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 195-226, February.
  8. David Card & Francesco Devicienti & Agata Maida, 2010. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," NBER Working Papers 16192, National Bureau of Economic Research, Inc.
  9. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  10. Ian Gregory-Smith & Steve Thompson & PeterW. Wright, 2009. "Fired or Retired? A Competing Risks Analysis of Chief Executive Turnover," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 119(536), pages 463-481, 03.
  11. Nickell, S & Vainiomaki, J & Wadhwani, S, 1994. "Wages and Product Market Power," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 61(244), pages 457-73, November.
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  1. Bosses as robber barons
    by chris dillow in Stumbling and Mumbling on 2012-06-12 13:03:09
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Cited by:
  1. Ana P. Fernandes & Priscila Ferreira & L. Alan Winters, 2014. "The Effect of Competition on Managers' Compensation: Evidence From a Quasi-natural Experiment," NIMA Working Papers, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho 57, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.

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