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Title: Do Incentivized Managers Pay Their Workers Less?

Citation Type: Miscellaneous

Publication Year: 2019

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Abstract: 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 pays and model settings. Using a novel instrumentalvariable strategy based on a tax policy change, we provide evidence that an increase in the CEO’s 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.

Url: https://www.umass.edu/economics/sites/default/files/Huang%2C Kuochih - Job Market Paper.pdf

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Authors: Huang, Kuochih; Lu, Chyi-Horng

Publisher: University of Massachusetts

Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure, Other

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