Compensation of Divisional Managers: Peer Effects inside the Firm

Using hand-collected data on divisional managers at S&P 1500 firms, we study how changes in one divisional manager’s compensation affect the compensation of other divisional managers inside the same conglomerate. An increase in a manager’s pay driven by an industry shock generates large positive intra-firm spillovers on the pay of other divisional managers. These spillovers operate only within firm boundaries and are non-existent for the same industry pairs in standalone firms. The intra-firm spillovers are stronger when managers share social networks, suggesting that informal interactions facilitate peer effects. The intra-firm convergence in executive pay is associated with weaker governance and lower firm value. Overall, we provide evidence on corporate socialism in executive pay