The influence of long-term managerial orientation on pay inequality

Abstract

This paper examines the relationship between a firm's long-term managerial orientation and in-firm pay inequality. We exploit two exogenous shocks to firms’ long-term orientation, in the form of inheritance and estate tax changes in Taiwan in 2008 and 2017. Using over a decade's worth of pay inequality data, we demonstrate that a more (less) long-term managerial orientation in a firm, driven by decreases (increases) in estate tax, leads to an increase (decrease) of in-firm pay inequality. Further analysis suggests that changes in-firm pay inequality are associated with changes in executive compensation, rather than with changes in ordinary employee compensation. Furthermore, our results are more pronounced in firms with higher degrees of family ownership and firms in more competitive industries. This paper suggests policy implications for amendments to estate tax since in-firm pay inequality will increase as a result of decreases in estate tax, via effects on firms’ long-term managerial orientation.