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Promotions, Demotions, Halo Effects and Earnings Dynamics of American Executives

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  • Christian Belzil

    ()
    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

  • Michael Bognanno

    (Department of economics - Temple University)

Abstract

This paper explores the dynamics of wage growth in corporate hierarchies. Using panel data techniques, we estimate the causal effect of current and past transitions in reporting level and past earnings growth on components of current earnings and earnings growth using a large panel of US executives. After conditioning on unobserved heterogeneity, current compensation growth is positively correlated with past promotion outcomes but negatively correlated with past compensation growth. In a flexible model of wage growth, there is an important asymmetry between the effect of a promotion and a demotion. The effect of promotion is smaller in magnitude than the effect of a demotion. The causal effect of a promotion is positive on both growth in base pay and total cash compensation but is negative on bonus growth. The effect of a demotion is negative on growth in all pay components.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00142838.

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Date of creation: Sep 2006
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Handle: RePEc:hal:journl:halshs-00142838

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Keywords: earning growth ; promotion ; reputation;

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References

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  1. Belzil, Christian & Bognanno, Michael L., 2004. "The Promotion Dynamics of American Executives," IZA Discussion Papers 1003, Institute for the Study of Labor (IZA).
  2. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 881-919, November.
  3. Canice Prendergast, 1998. "What Happens within Firms? A Survey of Empirical Evidence on Compensation Policies," NBER Chapters, in: Labor Statistics Measurement Issues, pages 329-356 National Bureau of Economic Research, Inc.
  4. James Malcomson & James A. Fairburn, 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 26, University of Oxford, Department of Economics.
  5. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589826.
  6. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  7. Thomas J. Dohmen & Ben Kriechel & Gerard A. Pfann, 2004. "Monkey bars and ladders: The importance of lateral and vertical job mobility in internal labor market careers," Journal of Population Economics, Springer, Springer, vol. 17(2), pages 193-228, 06.
  8. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
  9. Jonathan S. Leonard, 1990. "Executive pay and firm performance," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 13-29, February.
  10. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589833.
  11. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  12. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 991-1010, October.
  13. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(2), pages 290-315, April.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  15. Michael Gibbs & Wallace Hendricks, 2004. "Do formal salary systems really matter?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
  16. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
  17. John Haltiwanger & Marilyn E. Manser & Robert Topel, 1998. "Labor Statistics Measurement Issues," NBER Books, National Bureau of Economic Research, Inc, number halt98-1.
  18. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 19(2-3), pages 247-277, April.
  19. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589819.
  20. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 14(2), pages 175-209, April.
  21. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1321-1358, November.
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Cited by:
  1. Steffen Altmann & Armin Falk & Matthias Wibral, 2012. "Promotions and Incentives: The Case of Multistage Elimination Tournaments," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 30(1), pages 149 - 174.
  2. Giovanni Russo & Wolter Hassink, 2008. "The Part-Time Wage Gap: a Career Perspective," De Economist, Springer, Springer, vol. 156(2), pages 145-174, June.

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