How Much Does Your Boss Make? The Effects of Salary Comparisons

by Zoë B. Cullen and Ricardo Perez-Truglia

Overview — This study of more than 2,000 employees at a multibillion dollar firm explores how perceptions about peers’ and managers’ salaries affect employee behaviors and preferences for equity. Employees exhibit a high tolerance for inequality when job titles differ, which may explain why incentives are granted through promotions, and gender pay differences are most pronounced across positions.

Author Abstract

We study how employees learn about the salaries of their peers and managers and how their beliefs about those salaries affect their own behavior. We conducted a field experiment with a sample of 2,060 employees from a multibillion dollar corporation. We combine rich data from surveys and administrative records with data from the experiment, which provided some employees with accurate information about the salaries of others. First, we document large misperceptions about salaries and identify some of their sources. Second, we find that perceived peer and manager salaries have a significant causal effect on employee behavior. These effects are different for horizontal and vertical comparisons. While higher perceived peer salary decreases effort, output, and retention, higher perceived manager salary has a positive effect on those same outcomes. We provide suggestive evidence for the underlying mechanisms. We conclude by discussing implications for pay inequality and pay transparency.