Hierarchies and Compensation: A Case Study

By George Baker, Michael Gibbs, and Bengt Holmstrom

Abstract
Despite increasing interest in the theory of the firm, in empirical economics firms are still by and large black boxes. Our knowledge of the internal workings of firms has not kept pace with our theories of hierarchies, incentive schemes, careers, and internal labor markets. This paper fills some of this gap, by quantitatively describing part of the hierarchical structure of a single firm, using personnel records over a period of twenty years. We analyze features of careers within this hierarchy, documenting promotions, demotions, and other movements, and present evidence on the relationship between the hierarchy and compensation. Because few studies have used this kind of data and our dataset is relatively comprehensive, one goal is to generate stylized facts and questions that can guide further theoretical research. A second is to explore the usefulness of firm-level data in testing theories of the firm.

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