Ownership, Governance, and Pay in Britain

Ownership, governance, and pay in Britain

This paper examines whether pay levels differ between workplaces where corporate ownership is dispersed and those where it is more concentrated.  The starting point is that managers have greater discretion (vis-à-vis owners) in wage-setting when ownership is widely held because dispersed owners have higher coordination costs and weaker incentives to monitor managers.  These managers may exploit this discretion to pay themselves and their workforces more than in those workplaces in which owners have greater control of managers. In the literature, observed pay differences between these workplaces are usually attributed to managerial opportunism (Williamson 1964): managers with discretion pay higher wages to legitimize their own salaries, to achieve a ‘quiet life’ (Bertrand and Mullanaithan 1999), or to secure allies amongst the workforce against takeover bids (Pagano and Volpin 2005).  A less common explanation is a human capital one: managers with discretion pay higher wages to reward higher quality human capital, which in turn arises from the use of strategic HRM practices (Liu et al 2013)    

            This paper uses data in  the Workplace Employment Relations Survey (WERS), conducted in Great Britain in 2011.  The survey has detailed information on workplace employment institutions and practices and further information on corporate-level characteristics relating to ownership and governance.  This questionnaire is supplemented by a Employee Questionnaire containing data on occupation, weekly pay, hours of work, and personal information on gender, age, education, and tenure.  The two surveys are linked to examine how corporate and workplace-level phenomena affect individual worker pay.  The final useable sample of workplaces and employee respondents is 915 workplaces and 8,727 employees.

The main result is clear and consistent: dispersed ownership is associated with higher hourly pay, even after the insertion of an extensive range of demographic, job, and workplace controls.    Moreover, this finding is consistent across most of the wage distribution, with the dispersed ownership premium at a similar level at each quantile.  The findings are striking: most workers benefit from ownership dispersion.  Indeed, contrary to a self-interest perspective, the results indicate that managers benefit less than others.

We find that, relative to concentrated ownership workplaces, dispersed workplaces employ workers with better education and longer job tenure, both of which are associated with higher pay.  These important compositional differences suggest that managers with discretion in dispersed ownership workplaces are able to manage their workplaces in different ways to those in concentrated ownership workplaces.  Specifically, they are more able to build high-qualified, stable workforces. 

   These results contribute to a small, but growing, literature which has sought to extend the theory and insights of CG research to employee remuneration (Kreuger, 1991; Bertrand and Mullainathan 2003; Cronqvist et al. 2009; Liu et al. 2014).  Our results are consistent with both principal-agent and ‘strategic’ HRM and ‘stewardship’ perspectives on organisational management (Liu et al. 2014; Harrell-Cook and Ferris 1997).  This contrasts with the prevailing approach in much of the literature, where management opportunism is viewed as the primary outcome of discretion (Cronqvist et al 2009; Aghion et al 2013).