Owner culture and pay inequality within firms

Abstract

Using a comprehensive dataset of employee-employer-firm owner immigration records in 2001-2017, we examine the impact of immigrant owners’ national culture on within-firm pay inequality. Firms owned by immigrants from more individualistic countries exhibit higher pay dispersion among employees. This result is robust across various empirical methods, including difference-in-differences analysis of ownership changes. Owners’ individualism is associated with their employee compensation structures: more frequent and larger performance pay components—especially for highly educated employees, quicker promotions to high-paying positions, and less pay compression. These findings highlight the role of culture in shaping pay practices and elucidate broader determinants of income inequality. Valuation Insight: Firms owned by immigrants from more individualistic countries exhibit a higher degree of pay dispersion among their employees. The reasons are a greater emphasis on pay tied to performance and faster promotion of high-performing employees. To the extent that firm value is materially associated with these employee management policies the results suggest a key role of owner cultural background in determining firm value.