Pay for Performance and Compensation Inequality: Evidence from the ECEC

It is well known that earnings inequality in the United States has been on the rise over the last three decades. Compensation inequality, while much less studied, has been moving upward as well. Motivated in part by an attempt to explain a widening of inequality in the upper part of the distribution, Lemieux, MacLeod and Parent (2009) investigated the relationship between the use of performance pay schemes and wage inequality using the Panel Study of Income Dynamics. Viewing such a contractual arrangement as a channel through which rising demand for skill is translated into increased inequality, they estimated that pay for performance accounts for about one-fifth of the growth in the variance of male wages between the late 1970s and the early 1990s, and for almost all of the increase in wage inequality in the top quintile during the same period. In this paper, we also assess the relationship between performance pay and inequality, making a number of different contributions to the literature. First, the dataset we use, the Bureau of Labor Statistics’ Employee Costs for Employee Compensation (ECEC), allows us to look at a much broader concept of pay than that used by LMP, which consists largely of hourly earnings inclusive of performance pay (bonuses, piece-rates and commissions). It is important to relate methods of pay to total compensation because any effects noted on wages may be offset or amplified when one moves to broader definitions of compensation. Second, there are numerous types of bonuses, not all of which fall under the rubric of pay for performance. While LMP are forced by the limitations in the PSID to treat all types of bonuses as being the same, in some of our analyses, we are able to distinguish among them. Third, while the LMP analysis ends in the mid-1990s, our investigation is of a more recent time period, 1994 to 2010. Finally, allowing greater precision in our estimates, our dataset is significantly larger than the PSID. Our results suggest that while the presence of performance pay jobs is associated with higher levels of inequality, such jobs have made only a modest contribution toward an increase in inequality in the period under study.