The impact of publicising executive pay
22/10/2010
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Numerous submissions to the executive pay enquiry by Australia’s Productivity Commission bemoaned the publication of executive pay levels, claiming, among other things, that it contributed to the ratcheting up of executive pay.  The Commission, in the end, concluded that there was no evidence for this.  Others, not game enough perhaps to make a formal submission to the Commission, believe that executive pay publication just causes anger and envy on the part of those who are not so well paid, and thus contributes to regulatory intervention to curb inequality, regardless of the fact (supported by the Productivity Commission) that the levels of executive pay are largely the result of market forces, and the consequence of a market based meritocracy.

There may be scientific support for both views.

A new study by researchers at the University of California at Berkeley and Princeton University suggests that if all of our salaries were made known tomorrow, half of us would be made miserable and the other half would be made no happier.

 

That is more or less what happened at the University of California.  Faculty and staff there are on the state’s payroll.  The passage in California of a right-to-know law in March 2008 enabled the Sacramento Bee to publish state worker salaries.  Authors of the study, now circulating as a working paper, contacted a random set of workers at three UC campuses and informed them of the web site publication.  A few days later, they surveyed all campus employees on how they used the Bee’s site, on their satisfaction with their job and pay, and on whether they had job search intentions.

The findings: use of the site spread quickly, and 80% of new users said they looked up salary details on colleagues in their department.  Among workers whose pay was below the median for their department, job satisfaction plunged and likelihood of searching for a new job increased.  Interestingly, among those who were paid above the median, there was no meaningful change.  Applied to executive pay, this would imply that companies would need to lift pay to the median level.  But of course, moving everyone towards median actually shifts the median upwards.  Pay ratcheting occurs.

Hence the University of California finding suggests employers have more to lose than to gain from publishing salaries.  Inexpensive workers might leave and costly ones are not made more loyal.

On the other hand, there is not much support for companies to pay above median.

There is also scientific support for the threat of further regulation from publishing executive pay.  The fear fits neatly with something called the inequality aversion theory, proposed in 1999 by researchers in Zurich and Munich.  In experiments, human subjects proved willing to sacrifice potential rewards if they could block others from receiving superior rewards.  In other words, subjects in many cases cared more about fairness than gain.  A 2003 study (see HERE) involving monkeys showed similar behaviour, although we are in no way implying that the political process for pay regulation simulates the social behaviour of monkeys. 

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