Workplace Inequality in the U.S. and Managerial Rent Extraction: Evidence from Pay Growth Gaps

Paper Authors: Jie (Jack) He, Lei Li, Tao Shu

Using granular, individual-level compensation data, we study the escalating US workplace inequality by examining the within-firm difference in pay growth between executives and nonexecutive employees (i.e., “pay growth gap”). We document a large pay growth gap that increases in not only a firm’s idiosyncratic stock return, but also its systematic stock return. Importantly, there is a strong asymmetry in pay growth gaps: Executives, relative to employees, are rewarded for good idiosyncratic stock performance but not penalized as much for bad performance. This asymmetry becomes more pronounced when corporate governance is weaker, and further analyses support managerial rent extraction as a likely explanation rather than others. Unlike existing literature that mostly rationalizes the dramatic workplace pay inequality in an optimal contracting framework, our findings indicate that managerial rent extraction also plays an important role in the tremendous surge in such inequality.