Technological change and the growing inequality in managerial compensation

Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation....

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Bibliographic Details
Published in:Journal of financial economics 2011-03, Vol.99 (3), p.601-627
Main Authors: Lustig, Hanno, Syverson, Chad, Van Nieuwerburgh, Stijn
Format: Article
Language:English
Subjects:
Capital structure
Compensation
Corporate payout policy
Corporate payout policy Organizational capital Labor reallocation Managerial compensation Pay-for-performance sensitivity
Earnings
Economic models
Executive compensation
Financial performance
Income inequality
Inequality
Labor market
Labor reallocation
Managerial compensation
Organization theory
Organizational capital
Pay for performance
Pay-for-performance sensitivity
Senior management
Studies
Technological change
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Summary:Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades. This increased sensitivity of compensation to performance provides large, successful firms with the glue to retain their managers and the organizational capital embedded in them.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2010.09.007