Association for Public Policy Analysis & Management

The paper examines the role of the modern firm in the creation of inequality of income. Specifically, it examines the growth in the use of asset based rewards for senior executives, combined with continued use of salaried rewards for other employees, and the impact this has on measures of inequality both within the firm and society.  If Piketty (2014) is correct that asset values tend to outstrip GDP then, other things equal, policies that reward one group with assets and others with wages will increase income inequality within the firm over time. The paper further argues that, since employment in firms that use asset based rewards for executives remains a substantial proportion of overall employment, the use of the firm as the unit of analysis for the examination of societal inequality, whether from a theoretical or policy based point of view, has some merit.

Section 1 of the paper elaborates the conceptual links between intra firm and social inequality; it discusses the different measures used for intra firm inequality (usually ratios) and social inequality (usually the Gini coefficient). Several of the commonly used measures of intra-firm inequality (such as earnings multiples) are easily gamed and we will examine some of the vulnerabilities of such measures to gaming behaviour. 

Section 2 reviews the literature on the spread of asset-backed rewards for senior management since “Big Bang”, the deregulation of the financial markets in London in 1986; it argues that capital market oversight is a crucial factor in the spread. The financial theory of the firm sees the use of asset-based executive compensation as central to the solution to the agency problem in public corporations. However, much of the literature on executive remuneration examines its impact on market capitalisation of the firm, not inequality.  This literature is, in any event, much smaller for UK than USA.

Section 3 presents data on intra firm inequality for the UK. Both commercial and government data indicate that some measures of intra-firm inequality have increased substantially since Big Bang. 

Section 4 uses the data set to address three questions: Question1: since “Big Bang”, how has the expansion of asset-based executive compensation contributed to the observed rise in intra-firm inequality of income? Question 2: over the same period, what is the relationship between inter-firm variance in corporate remuneration practice and inter-firm measures of inequality of income? Question 3: how do changes in intra-firm measures of inequality relate to changes at the societal level?

The paper bridges two very distinct literatures. First, the business and finance literature on executive compensation that is interested in impact on firm performance but, as yet, not much in inequality; second, the literatures on inequality that have not yet considered the firm, and specifically firm remuneration decisions, as a unit of analysis. The paper contributes to these two developing literatures.  It has managerial implications for executive pay strategies and policy implications for the way that firms are required to disclose the relationship between executive and all-employee pay.