Inequality Aversion When the Reward is Scarce: The Case of Salary vs. Equity Compensation

Jiayi Bao, Applied Economics, The Wharton School, and Andy Wu, Harvard Business School

Abstract: Do workers have different equality preferences depending on the type of payoff? In many firms, the distribution of equity compensation is more equal than the distribution of salary. We design an experimental group production game to examine how workers respond to combinations of different distributions of equity and salary. Results suggest that workers view salary and equity in two separate domains, and they are more inequality averse in the equity domain. Furthermore, inequality aversion in equity is more severe than in salary because equity is perceived as the more scarce reward when shown in percentage form.

Read the full working paper here (PDF).