A middle-manager model of wage and salary distribution within firms

Management structure affects income distribution within the firm. We construct a model in which the managerial wage bill is determined by the number of direct reports to each manager (the “span of control”) and the increase in pay between levels in the managerial hierarchy. The model explains, in a natural way, one of the best-documented observations in firm compensation: that CEO pay increases with the size of the firm. It also shows that rising span of control will normally lead to a decline in the ratio of the managerial wage bill to that of production workers. As span of control has been rising in recent decades, this appears to be inconsistent with the widely-documented rise in income inequality. The discrepancy is explained by the rapid expansion of equity-based compensation.