In response to general calls for increased transparency in society, pay transparency policies are growing in importance. Given that pay transparency unavoidably gives employees the opportunity to make comparisons between themselves and others, in this study we address the question of how these comparisons impact the incentive effects of performance contingent pay, and consequently their performance outcomes. Specifically, we empirically examine whether horizontal pay dispersion alters the effectiveness of performance-based pay contracts, which firms typically use to incentivize effort. Exploiting our unique access to a large healthcare provider, we document the moderating role of horizontal pay dispersion on the effectiveness of individual monetary incentives at generating increased individual performance. To provide a more nuanced understanding of the moderating effect of pay dispersion, we further examine the boundary conditions of the proposed interaction. In particular, we examine the differential effect of overall pay dispersion on employees that rank high versus low in the pay distribution and disaggregate overall pay dispersion into performance-related versus performance-unrelated pay dispersion. Our findings consistently show a positive moderating effect of pay dispersion when employees are more likely to consider the observed pay dispersion as legitimate, and a negative moderation effect when this is less likely the case. Our study strengthens the understanding of how individual level incentives function in the context of a multi-person firm setting. Our results document that individual incentives are effective, but also suggest that pay dispersion can have a significant influence on the incentive-performance relation. These findings provide some evidence that individuals are concerned not only with their own payout, but also with that of others, and that this concern has a significant impact on individual’s effort provision, and consequently performance.

This paper investigates the relation between executive compensation and corporate tax policies, with a focus on the Tax Cuts and Jobs Act of 2017 (TCJA). Using a pay-performance sensitivity framework, we analyze the differing compensation rewards associated with domestic and foreign pre-tax incomes. Our findings reveal that, before the TCJA, executives received significantly higher rewards for foreign income, encouraging them to shift income abroad. The TCJA reduced this disparity, bringing rewards for domestic and foreign income into closer alignment. A cross-sectional analysis shows that firms assessing CEO performance based on after-tax income exhibit greater sensitivity to changes in tax policy, establishing the presence of a tax mechanism. Additional tests eliminate alternative nontax explanations related to protectionist trade policies and changes in foreign market growth opportunities. These results highlight the significant impact of executive incentives on corporate tax behavior and the effectiveness of tax policy reforms.