Explaining Pay Disparities between Top Executives and Nonexecutive Employees: A Relative Bargaining Power Approach

Abstract

The widening pay gap between corporate executives and rank-and-file workers has attracted much attention in the United States, but the sources of the pay gap have not been systematically examined. In this paper, I use a relative bargaining power approach to explore the sources of pay disparity between executives and nonexecutive employees in the United States. I argue that the bargaining power of labor affects executive compensation, nonexecutive compensation, and the executive-worker pay gap and that this effect is moderated by the characteristics of the chief executive officers (CEOs) who implement organizational policies. An analysis of 185 US firms provides evidence that labor's bargaining power reduces the pay gap between executives and nonexecutive employees. This effect is mainly through the unions' impact on executive compensation. The results also suggest that labor's effect of narrowing the gap becomes weaker when the CEO has a finance background or when the CEO was recruited from outside the company rather than being promoted from within. These findings shed new light on our understanding of the linkage between firm-level dynamics and the rise in income inequality.

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