DRAFT

Ulric B. and Evelyn L. Bray Social Sciences Seminar

Tuesday, October 24, 2017
4:00pm to 5:00pm
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Baxter B125
How Much Does Your Boss Make? The Incentive Effects of Horizontal and Vertical Inequality
Ricardo Perez-Truglia, Assistant Professor, Anderson School of Management, UCLA,

Abstract: We study how employees learn about the salaries of their peers and managers, and how those beliefs affect their behavior. We conducted a field experiment with a sample of 2,000 employees from a multi-billion-dollar corporation. First, we document large misperceptions about salaries and identify some of the sources of these misperceptions. Second, we identify the causal effects of these beliefs by means of an experiment that provided employees with feedback about the salaries of others. We combine unique survey and administrative data to estimate cross-salary elasticities. We find that individuals do not tolerate horizontal inequality: higher perceived peer salary has large negative effects on satisfaction, effort, output and retention. On the contrary, individuals tolerate vertical inequality: if anything, higher perceived manager salary has a positive effects on motivation, even when the likelihood of reaching the managerial position is small. Our findings reject the widespread belief that fairness concerns compress pay inequality in the firm. We discuss other implications of these findings, including optimal transparency.
Research was performed with Z. Cullen.

For more information, please contact Letty Diaz by phone at 626-395-1255 or by email at letty.diaz@caltech.edu.