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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.

Suggested Citation

  • Brian Bell & John Van Reenen, 2011. "Firm Performance and Wages: Evidence from Across the Corporate Hierarchy," CEP Discussion Papers dp1088, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1088
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    File URL: http://cep.lse.ac.uk/pubs/download/dp1088.pdf
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    References listed on IDEAS

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    1. Henrik Cronqvist & Fredrik Heyman & Mattias Nilsson & Helena Svaleryd & Jonas Vlachos, 2009. "Do Entrenched Managers Pay Their Workers More?," Journal of Finance, American Finance Association, vol. 64(1), pages 309-339, February.
    2. Mahmood Arai, 2003. "Wages, Profits, and Capital Intensity: Evidence from Matched Worker-Firm Data," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 593-618, July.
    3. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
    4. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 84-111.
    5. Nickell, S & Vainiomaki, J & Wadhwani, S, 1994. "Wages and Product Market Power," Economica, London School of Economics and Political Science, vol. 61(244), pages 457-473, November.
    6. John Van Reenen, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U. K. Companies," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 195-226.
    7. Stephen G. Bronars & Melissa Famulari, 2001. "Shareholder Wealth and Wages: Evidence for White-Collar Workers," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 328-354, April.
    8. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
    9. Ian Gregory-Smith & Steve Thompson & PeterW. Wright, 2009. "Fired or Retired? A Competing Risks Analysis of Chief Executive Turnover," Economic Journal, Royal Economic Society, vol. 119(536), pages 463-481, March.
    10. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2010. "Inequality and Unemployment in a Global Economy," Econometrica, Econometric Society, vol. 78(4), pages 1239-1283, July.
    11. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 227-251.
    12. Bell, Brian & Van Reenen, John, 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.
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    1. Bosses as robber barons
      by chris dillow in Stumbling and Mumbling on 2012-06-12 18:03:09

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    Cited by:

    1. Simon Cornée & Ariane Szafarz, 2018. "How Costly is Social Screening? Evidence from the Banking Industry," Economics Bulletin, AccessEcon, vol. 38(1), pages 532-540.
    2. Bryan, Mark & Bryson, Alex, 2016. "Has performance pay increased wage inequality in Britain?," Labour Economics, Elsevier, vol. 41(C), pages 149-161.
    3. Fernandes, Ana & Ferreira, Priscila & Winters, L. Alan, 2014. "The Effect of Competition on Managers’ Compensation: Evidence From a Quasi-natural Experiment," CEPR Discussion Papers 10054, C.E.P.R. Discussion Papers.
    4. repec:bla:brjirl:v:55:y:2017:i:4:p:778-801 is not listed on IDEAS
    5. Lucy Stokes & Alex Bryson & John Forth & Martin Weale, 2017. "Who Fared Better? The Fortunes of Performance Pay and Fixed Pay Workers through Recession," British Journal of Industrial Relations, London School of Economics, vol. 55(4), pages 778-801, December.

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