Equality and Equity in Compensation

Jiayi Bao and Andy Wu

Harvard Business School

2017

Equity compensation is widely used for incentivizing skilled employees, particularly in new technology businesses. Traditional theories explaining why firms offer equity suggest that workers with higher rank should receive compensation packages more heavily weighted in equity. However, we observe the puzzle that many firms adopt an equality-in-equity strategy: they offer different cash salaries across all jobs but the same equity compensation. We propose a behavioral theory of domain-contingent inequality aversion to explain this finding: we argue that workers view salary and equity as two domains and are more inequality averse in the equity domain. Inequality in equity has a negative asymmetric effect on effort whereas the effect of inequality in salary can be positive. Our experimental findings are consistent with the existence of domain-contingent inequality aversion.

Design of Experiments: Laboratory, Individual, Design of Experiments: Laboratory, Group Behavior, Wage Level and Structure, Wage Differentials, Compensation Packages, Payment Methods, New Firms, Startups, Personnel Economics: Compensation and Compensation Methods and Their Effects, Personnel Economics: Labor Contracting Devices

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