How redistributive institutions affect pay inequality and heterogeneity among top managers

Abstract

In recent years, many scholars have investigated the incredible rise of executive pay and the role of institutions as moderators of this trend. We argue that a crucial problem for attempts to moderate these increases remains the heterogeneity among top managers. Redistributive institutions can better target pay inequality among management than institutions that treat all managers or companies the same. To show this, we use a novel data set of executive pay across 17 OECD countries. We compare the effect of different institutional factors: corporate and personal income taxation, union bargaining power, and regulation (shareholder protection). We find that redistributive institutions such as personal income tax and union bargaining power seem to be more effective in addressing this heterogeneity in pay and in moderating remuneration in firms with very large market value than smaller firms.