The past decade has seen a remarkable rise in income inequality in the United Kingdom. The authors explore not only the wages but also the share of income and wages at the very top of the corporate hierarchy in the country and find that workers in the financial sector account for the majority of the inequality trend.
In the United Kingdom, almost all the gains in earned income over the last decade (i.e., 1998–2008) were accrued from the wages of those working in the financial sector. Firms with less institutional ownership are more likely to offer asymmetrical rewards to top management.
How Is This Article Useful to Practitioners?
The authors’ findings suggest that senior executives reap the rewards of success, whereas the wages of more junior managers and workers are much more weakly correlated with firm performance.
Over the last decade, the pay of CEOs and senior executives has risen much faster than that of ordinary workers. The median pay of a CEO of a FTSE 100 company increased from being 11 times higher than the median worker’s pay in 1980 to 116 times higher in 2010. Furthermore, CEO pay seems to be unrelated to the CEO’s actual contribution to the firm.
Ordinary workers’ pay appears to be relatively less responsive to a firm’s positive performance, but poor performance can lead not only to lower wages for the ordinary worker but also to a possibility of job separation. In contrast, the pay of CEOs and senior executives within the firm is strongly correlated with corporate performance. Firms with lower levels of institutional ownership are less likely to link CEO pay with firm performance, and these firms show a marginal propensity to reward positive performance more than they penalize negative performance. Higher-ownership firms appear to reward positive performance and penalize negative performance with perfect symmetry.
The authors discuss asymmetrical pay, which exists at the bottom of the corporate pyramid. Poor firm performance may lead to lower wages or an increased probability of a job separation for average workers, but their salary is less correlated with positive firm performance.