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      Equality and Equity in Compensation
      12 May 2017Working Paper Summaries

      Equality and Equity in Compensation

      by Jiayi Bao and Andy Wu
      Why do some firms such as technology startups offer the same equity compensation packages to all new employees despite very different cash salaries? This paper presents evidence that workers dislike inequality in equity compensation more than salary compensation because of the perceived scarcity of equity.
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      Author Abstract

      Equity compensation is widely used for incentivizing skilled employees, particularly in new technology businesses. Traditional theories explaining why firms offer equity suggest that workers with higher rank should receive compensation packages more heavily weighted in equity. However, we observe the puzzle that many firms adopt an equality-in-equity strategy: they offer different cash salaries across all jobs but the same equity compensation. We propose a behavioral theory of domain-contingent inequality aversion to explain this finding: we argue that workers view salary and equity as two domains and are more inequality averse in the equity domain. Inequality in equity has a negative asymmetric effect on effort whereas the effect of inequality in salary can be positive. Our experimental findings are consistent with the existence of domain-contingent inequality aversion; we also find that inequality aversion in equity is more severe than in salary because of the perceived scarcity of equity.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: April 2017
      • HBS Working Paper Number: HBS Working Paper #17-093
      • Faculty Unit(s): Strategy
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      Andy Wu
      Andy Wu
      Assistant Professor of Business Administration
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