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Firm performance and wages: evidence from across the corporate hierarchy

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  • Bell, Brian
  • Van Reenen, John

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.

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  • Bell, Brian & Van Reenen, John, 2012. "Firm performance and wages: evidence from across the corporate hierarchy," LSE Research Online Documents on Economics 121751, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121751
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    References listed on IDEAS

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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. John Forth & Alex Bryson & Lucy Stokes, 2016. "Are firms paying more for performance?," International Journal of Manpower, Emerald Group Publishing, vol. 37(2), pages 323-343, May.
    3. Bryan, Mark & Bryson, Alex, 2016. "Has performance pay increased wage inequality in Britain?," Labour Economics, Elsevier, vol. 41(C), pages 149-161.
    4. 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.
    5. Brian Bell & Paweł Bukowski & Stephen Machin, 2024. "The Decline in Rent Sharing," Journal of Labor Economics, University of Chicago Press, vol. 42(3), pages 683-716.
    6. Ana P. Fernandes & Priscila Ferreira & L. Alan Winters, 2014. "The Effect of Competition on Managers' Compensation: Evidence From a Quasi-natural Experiment," NIMA Working Papers 57, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.
    7. Machin, Stephen & Bell, Brian & Bukowski, Pawel, 2018. "Rent Sharing and Inclusive Growth," CEPR Discussion Papers 13408, C.E.P.R. Discussion Papers.
    8. John Forth & Alex Bryson & Lucy Stokes, 2016. "Are firms paying more for performance?," International Journal of Manpower, Emerald Group Publishing Limited, vol. 37(2), pages 323-343, May.

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    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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