Agata Maida (University of Milan)

Labor seminar

CEO pay disclosure and wage inequality within firm

Abstract. We analyze the effect of CEO pay disclosure on the within-firm earnings distribution by exploring a 1998 reform requiring Italian publicly listed companies to disclose the compensation of top executives. Using a difference-in-difference approach, we test whether the subsequent change in workers’ earnings follows the disclosed level of CEO pay. Although the effect on average earnings is economically small and only marginally significant, we uncover substantial heterogeneity. In firms where CEOs disclose high total compensation, the top five percent and one percent of the within-firm earnings distribution increase substantially following disclosure. The effect are smaller and generally insignificant for lower percentiles. As a result, we uncover a significant effect on measures of within-firm earnings inequality. Our results suggest that the disclosing a high CEO remuneration exerts an upward pressure on earnings, but only for workers in the upper part of the within-firm earnings distribution. These effects are stronger for workers located in the region where the firm’s operations concentrated and for low-experience workers, for which disclosure may be a more meaningful informational shock. Moreover, they appear to be driven by a change in workers’ bargaining power, rather than by sorting of new employees with different skills or reservation wages. Thus, CEO pay disclosure may have significant within-firm distributional consequences.