Research from Professor Melanie Wallskog showed that performance-based bonuses drive the pay gap within companies
With productivity almost doubling between 1980 and 2013 (2013 is the last available year for some of the data), the researchers estimated productivity may have accounted for up to 40% of the growth of pay inequality over the same period.
Image: Shutterstock
Year-end bonuses for CEOs and top managers may explain a significant amount of the rise in wage inequality in the last 40 years.
In a new working paper posted by the National Bureau of Economic Research, Melanie Wallskog, an assistant professor of finance at Duke University’s Fuqua School of Business, found that since the 1980s, as firm productivity went up, so did pay inequality, largely because of performance-based bonuses that disproportionately benefit the top earners.
“We originally thought that more productive firms may have lower inequality,” Wallskog said. “But what we see is that, even though in productive firms all employees do better, it's the people at the top who benefit the most.”
Wallskog and co-authors Nick Bloom of Stanford University, Fed economist Scott Ohlmacher, and U.S. Census Bureau economist Cristina Tello-Trillo found support for this pattern in both publicly traded and private companies, although the effect is almost twice as strong for public companies.
[This article has been reproduced with permission from Duke University's Fuqua School of Business. This piece originally appeared on Duke Fuqua Insights]