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

  • Christian Belzil

    ()

    (GATE CNRS)

  • Michael Bognanno

    (Temple University, Philadelphia)

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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File URL: ftp://ftp.gate.cnrs.fr/RePEc/2006/0606.pdf
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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0606.

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Length: 37 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:gat:wpaper:0606
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  1. 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.
  2. repec:cup:cbooks:9780521589833 is not listed on IDEAS
  3. Christian Belzil & Michael Bognanno, 2004. "The Promotion Dynamics of American Executives," CIRANO Working Papers 2004s-05, CIRANO.
  4. repec:cup:cbooks:9780521589826 is not listed on IDEAS
  5. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
  6. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
  7. 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, vol. 58(2), pages 277-97, April.
  8. Fairburn, J.A. & Malcomson, J.M., 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 9926, University of Oxford, Department of Economics.
  9. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  10. 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.
  11. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
  12. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  13. repec:cup:cbooks:9780521589819 is not listed on IDEAS
  14. 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, vol. 17(2), pages 193-228, 06.
  15. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
  16. Michael Gibbs & Wallace Hendricks, 2004. "Do Formal Salary Systems Really Matter?," ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
  17. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  18. 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.
  19. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
  20. John Haltiwanger & Marilyn E. Manser & Robert Topel, 1998. "Labor Statistics Measurement Issues," NBER Books, National Bureau of Economic Research, Inc, number halt98-1.
  21. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 175-209, April.
  22. Gibbs, Michael, 1995. "Incentive compensation in a corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 247-277, April.
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