Based on the GINI coefficient, a commonly used measure of income distribution, income inequality has increased in 63% of countries in the world from 1980 to the current decade, and has continued to expand since the Great Recession (post-2008). The Organization for Economic Cooperation and Development (OECD) estimates that growing inequality has shaved percentage points from the growth of Gross Domestic Product (GDP) of different countries between 1990 and 2010 cumulatively. However, the role that corporates play with regards to country-level income inequality is not as well understood. This paper attempts to begin bridging that gap by examining intracorporate pay gaps –defined as the ratio in pay between the highest paid executives and average employees.
The findings of this report suggest that intracorporate pay gaps paralleled country-level income inequality between 2009 and 2014. A ‘tragedy of the commons appeared to be in effect – or at a minimum, a tragedy of horizons – in which company management respond to short-term performance, which encourages tactics like maintaining dividends, share buybacks, and quarterly earnings. This short-termism tends to treat labor as a cost to be minimized rather than an asset to be utilized over extended time horizons.
A possible, though tenuous, relationship between intracorporate pay gaps and company profitability was found, that reflects academic findings that income inequality hinders GDP growth. This paper notes the possible “pendulum” effects of intracorporate pay gaps in which investor, social, or political pressure grows to either slow CEO pay growth or increase wages, especially for minimum wage workers. Lastly, labor output may suffer for companies operating in highly unequal markets.