Pay inequality and firm performance: evidence from matched employer–employee data

Abstract

This paper uses a large matched employer-employee data set for Sweden to analyse several predictions from tournament theory. For white-collar workers, a positive effect of intra-firm wage dispersion on profits and average pay is found. This result is robust to controls for human capital characteristics and firm fixed-effects as well as to instrumenting the wage dispersion variable. Using data on around 10,000 managers, the same relationships are also found for executives. Further results include a positive relationship between market demand volatility and wage dispersion for managers, and a negative effect of the number of managers (contestants) on managerial pay spread.

Top-Management-Teams' Compensation Packages

“…Previous empirical literature on the TMT supports this prediction (Bingley & Eriksson, 2001;Eriksson, 1999;Heyman, 2005;Main et al, 1993;Prendergast, 1999).…”

The impact of educational mismatch on firm productivity: Evidence from linked panel data

“…Given the importance of this issue, a growing empirical literature is devoted to analysing the relationship between wage dispersion and firm performance (e.g. Hibbs and Locking, 2000, Heyman, 2005, Martins, 2008. However, the precise impact of wage dispersion on firm performance still remains unclear as both positive and negative impacts are suggested (for a review see Mahy et al (2011a)).…”

Internal wage dispersion and firm performance: white‐collar evidence

“…A positive relationship between wage dispersion and firm performance is also concluded by Heyman (2005) who test several predictions of the tournament model using Swedish whitecollar data for the years 1991 and 1995. His results are robust with respect to different dispersion and performance measures and when instrumenting the dispersion measures by lagged values.…”