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Trade unions a blunt tool in reducing inequality

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A new study from LSE has found that the strong presence of trade unions in companies does not lead to a reduction in CEO pay.

In the paper written by Dr Umar Boodoo of LSE’s Department of Management, CEO pay packages were tracked for companies listed on the Toronto Stock Exchange between 2008 and 2011. The study compared firms which were heavily unionised and firms which had low or no union presence, and found that the presence of unions had little or no effect on constraining CEO salaries, bonuses, stock options, and pension benefits.

In many cases during the period studied, highly unionised companies saw CEO pay increase more rapidly than non-union competitors. Overall, a one point standard deviation increase in union density across companies was associated with a 9 per cent increase in total CEO pay. This, the paper observes, is mostly due to CEOs of highly unionised companies are paid higher salaries and pensions (and no lower bonuses and stock options) compared to their colleagues at lesser-unionised companies.

This finding contradicts research which suggests that the higher labour costs and lower profitability — often a feature of highly unionised companies— can act as a constraint on CEO pay. While trade unions may bring a number of benefits to their members, the study shows that incentivising trade union membership is unlikely to reduce the difference income between the highest earning and lowest earning groups in society, known as income inequality.

Dr Boodoo said: “The findings from this study suggest that higher unionisation tends to push up the salaries and pensions of CEOs; therefore trade unions have a limited effect on reducing inequality. An explanation for this could be that highly unionised companies bring greater pressures on management, and this has the effect of raising executive pay.

“If one of the goals of trade unions is to reduce inequality, they have not achieved this objective in the context of this study. Since the 1980s, CEO pay has been rising unabated, much faster than the cost of living, and often even when companies are not performing well. Other forms of corporate governance or indeed more concerted efforts at the societal level may be required to address growing income inequality.”

For more information

Peter Carrol, LSE Press Office, telephone: + 44 (0)207 955 6939, email: p.carrol@lse.ac.uk

Notes to editors: 

The paper, Do heavily-unionized companies compensate their CEOs less in periods of financial distress? Evidence from Canadian companies during the financial crisis, analysed 125 companies listed on the S&P/TSX between 2008 and 2011. Overall, Chief Executive pay increased during the period of the study. This finding was consistent even in the circumstances of lower and negative corporate performance, and for both  unionised and non-unionised companies.

Dr Muhammad Umar Boodoo is a LSE Fellow in the Department of Management.

LSE International Inequalities Institute will bring together experts from many LSE departments and centres to lead critical and cutting edge research to understand why inequalities are escalating in numerous arenas across the world.

28 September 2016