Promotions, Demotions, Halo Effects, and the Earnings Dynamics of American Executives

Abstract

This paper explores the determinants of earnings growth in corporate hierarchies using static and dynamic panel data techniques. The novelty derives from the distinction between base pay and bonus, the asymmetric effects of promotion and demotion, and the consideration of dynamic effects. We find that the convexity of pay structures is robust to the allowance for unobserved individual heterogeneity. Demotion has a stronger effect on compensation growth in absolute value than promotion. Dynamic models indicate that the causal effect of past promotion is positive on the growth in base and total pay but has no significant effect on bonus growth.