The Advisors' Blog

– Liz Dunshee

We know that executives are making a lot more than the average & median worker – and upcoming pay ratio disclosures will really bring that disparity into focus. This new research from the Kellogg School might get us closer to knowing why. Here’s a teaser:

Technological innovation is a significant factor in pay disparity, explaining about half of all fluctuations in the ratio of executive pay to worker pay. Their model implies that periods of rapid technological change will be accompanied by increases in differences in pay, both between executives and workers, as well as among different top executives.

In the model, game-changing technologies appear randomly and can increase the firm’s returns on certain capital-intensive projects. (Think Toyota choosing to develop the Prius just as electric batteries became more efficient and cheaper to produce.) Those returns then increase the executive’s paycheck—if the executive had the good sense to invest in a venture that took advantage of the technology, that is. Overall, finding new investment opportunities accounted for 63% of the average executive’s pay, with normal work duties accounting for the remainder.