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E-MailLily Fang is a Professor at INSEAD, Jim Goldman is an Associate Professor at McGill University, and Alexandra Roulet is an Associate Professor at INSEAD and a CEPR Research Fellow. This post is based on their recent article, forthcoming in the Journal of Finance.
Private equity has become an increasingly important form of corporate ownership around the world, yet it remains controversial. Labor concerns, in particular, are often at the forefront of the policy and public discussions about their investments. In our paper, lead article in the August 2026 issue of the Journal of Finance, we ask a question that this debate has largely left aside: what happens to the distribution of pay inside a company after it is bought out?
Theory offers competing answers. Post-buyout investment in technology may complement high-skilled workers while substituting for low-skilled ones, widening pay gaps. Alternatively, in the pursuit of efficiency, target firms may part with expensive employees and replace them with cheaper hires, compressing the pay distribution. Which force dominates is an empirical matter.
We match two decades of French leveraged buyouts to administrative employer-employee data covering the universe of French firms and workers between 1994 and 2017. France is the largest private equity market in continental Europe, and the data allow us to reconstruct the full wage distribution inside each firm year by year, linked to employee demographics and occupations. Our sample comprises 813 targets and 76,331 control firms, matched on two-digit industry and on terciles of size, profitability and employment growth in the year before the deal, and observed from three years before the transaction to three years after.
We find that pay gaps narrow after a buyout. The ratio between the 90th and the 10th percentile of the within-firm wage distribution falls by 3% relative to controls. The gender, age and manager/non-manager gaps decline by 9%, 21% and 4% respectively. These effects appear one year after closing and persist over the following three years, alongside higher profitability and higher employment — the latter consistent with earlier evidence on French private-to-private deals.
Changes in the composition of the workforce, rather than in the compensation of existing workers, drive these results. We find no evidence of cuts in the pay of remaining employees. What buyouts change is who works at the firm, especially in the managerial rank. Separation and hiring rates for managers run roughly 8% and 9% above control firms post-buyout. This matters because of a wage differential we document in target and control firms alike: separated employees are paid about 1% more than comparable employees, while the joiners replacing them are paid 6.5% less. This leaver-joiner pay differential means that turnovers dampen the average pay of a given rank. It turns out that this leaver-joiner differential is even wider among managers — a separated manager earned a 2.6% premium whereas a newly joined one had a 7.1% discount. Because of this larger leaver-joiner wage differential among managers, a given rate of turnover reduces average pay more at the top of a firm’s wage distribution than at the bottom. We call this the turnover effect. Crucially, it operates throughout the economy; private equity simply turbocharges it.
Whether the departing managers’ high pay represent rents or rewards for their firm-specific investments shapes how one reads the result. Our evidence leans toward the former: separated employees were earning premiums unexplained by their observable characteristics. There is also the related question of whether the high turnover rate among managers reflect private equity owners’ optimization of labor force efficiency or a breach of long-term implicit contract. Again, our evidence points towards the former view: a long tenure at a firm reduces the risk of separation by 50%.
Decomposing our results along the three demographic dimensions – gender, age, and skill level – yields a consistent picture. The pay gap reduction in each of these dimensions is driven by the relative decline of the high-pay category: relative to controls, the average pay falls by 2.4% for men, 6.0% for older employees, and 5.2% for managers, while pay for women, younger employees and non-managers tracks the control group. The reductions are not artifacts of one another — the gender and age effects hold within the manager group alone. Nor do they reflect wholesale changes in workforce composition: the share of women is unchanged, the occupational mix barely moves, but the workforce does become younger, as older employees separate more and are hired less. Taken together, the three gaps account for the entire decline in the p90/p10 ratio.
Two caveats deserve emphasis. Our results concern within-firm inequality, and the implications for aggregate inequality are not straightforward — buyouts still touch a tiny share of firms, especially in Europe. And the full welfare effect on all stakeholders, including separated employees, lies outside the scope of this paper. What we can say is that ownership type is a meaningful determinant of pay gaps inside the firm. Our findings show that labor force dynamism is a pay-gap-reducing mechanism observed throughout the economy, private-equity owned firms or otherwise. Private equity owners appear to use this mechanism more intensely than other firms.
