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Working Paper
| HBS Working Paper Series
| 2013
Pay Harmony: Peer Comparison and Executive Compensation
by
Claudine Gartenberg and Julie Wulf
|
Abstract
Do horizontal wage comparisons affect firm policies on executive pay? This paper explores that question using a 1992 SEC proxy disclosure rule that mandated increased disclosure of executive pay. We argue that this rule differentially increased wage comparisons within firms with geographically-dispersed managers—firms with the greatest information frictions prior to the rule change. We report three changes related to compensation after 1992 for division managers. First, within firms with dispersed managers, division manager pay is less sensitive to individual performance and co-moves more with peer pay. Second, pay disparity between managers located in different states decreases relative to that of co-located managers. Third, division productivity falls in dispersed firms, with the effect driven by managers at the low end of the wage distribution. Taken together, our findings suggest that principals account for horizontal peer comparison when designing executive wage contracts and that they face a tradeoff between the incentive effects of performance-based pay and effects of peer comparison.