The Effects of Monetary Reward Distribution on Company Performance - Introducing Wage Dispersion Volatility
Sammanfattning: This paper aims to explore the effects of monetary reward distribution within the company on company performance. We introduce a measure called wage distribution volatility (WDV), that captures how the pay gap between the CEO and other employees varies over time. Linear regression is performed for both WDV against company alpha and relative standard deviation of CEO salary (RSDC) against company alpha for a seven year period for companies listed on the Stockholm Stock Exchange during 2010-2016. For companies with alpha between -2 and 2 and WDV<10 we find a significant negative correlation between WDV and performance (adjusted R^2 = 0.191, p<0.01), and even stronger for companies with <1000 employees (adjusted R^2 = 0.275, p<0.01). We also create a binary classifier that is able to predict the sign of alpha with 78% accuracy, given the constraints. However, most, if not all, of the effect stems from the RSDC alone. This study suggests that Swedish companies should keep the total CEO salary relatively constant, especially if the company has less than 1000 employees, and adopt the culture behind such a wage composition. We suggest further research to investigate whether WDV has an additional effect compared to RSDC or not, and to expand to different countries.
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