Managerial accountability for payroll expense and firm-size wage effects

Robertas Zubrickas

No 474, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: We argue that job performance appraisal is an agency problem with asymmetric transfer values: an employee is paid in proportion to the rating received from his line manager, who only partially internalizes the resultant payroll cost. This asymmetry in rating valuations is based on evidence that managers are not fully accountable for payroll expense, with the degree of unaccountability increasing in firm size. We develop a nested agency model of economic organization of a firm with unaccountable managers, which in equilibrium obtains the firm-size wage effects - the large-firm wage premium and inverse relationship between firm size and wage dispersion.

Keywords: Compression of ratings; managerial incentives; soft budget constraint; firm-size wage effects; principal-agent model (search for similar items in EconPapers)
JEL-codes: D21 J30 M52 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
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