Distributional Concerns in Managers’ Compensation Schemes for Heterogeneous Workers: Experimental Evidence

We present results from three-player experiments aimed at studying distributional concerns in how owner-managers compensate themselves and workers of different productivities and effort costs, as well as their relations to various equity principles. We are also interested in how owner-managers decisions’ are affected by pay secrecy. We use a game in which workers first exert effort and owner-managers then decide on bonuses for themselves and workers. Our design includes four treatments: (1) different productivities of workers with complete information; (2) different productivities of workers with pay secrecy among workers; (3) different effort cost of workers with complete information; and (4) different effort cost of workers with pay secrecy among workers. The equity principles we focus on are ‘production-equity’, higher production leads to higher wage, and ‘effort-cost equity’, higher effort-cost leads to higher wage. Across all treatments about 50% of all manager choices are compatible both with ‘production equity’ and with ‘effort- cost equity’, about 20% only with production equity and about 15% only with effort-cost equity. Overall, the effect of effort-cost equity is significantly stronger than that of production-equity. Pay secrecy does not significantly affect compensation differences among workers.