Do Incentivized Managers Pay Their Workers Less? Since the 1980s,
Chief Executive Officers' (CEO) pay has exploded, largely in the form
of equity-based incentive compensation such as stock awards and
options. Using a two-tiered principal-agent model, we show that
aligning managers' incentives with shareholder interests through
equity-based pay can lower workers' wages. Analyzing a sample that
matches firm, manager, and worker information in the U.S. economy over
the period 1992-2016, we show that higher equity-based pay is
associated with lower average wages across various measures of pay and
model settings. Using a novel instrumental-variable strategy based on
a tax policy change, we provide evidence that an increase in the CEO
equity-to-salary ratio by one unit, say, from 1:1 to 2:1, leads to a
4% decline in the average wage. We also find that while firms under
all degrees of competition raise equity pay in response to the policy
change, the negative impact on wages is stronger when the degree of
competition is high, suggesting that competition does not substitute
for executive compensation but amplifies its effect.
Author Bio
KUOCHIH HUANG is a Ph.D. candidate in Economics, University of
Massachusetts Amherst.
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25/02/2020 Last update