Does CEO compensation suppress employee wages?

Rachel Graefe-Anderson, Unyong Pyo and Baoqi Zhu

Review of Accounting and Finance, 2018, vol. 17, issue 4, 426-452

Abstract: Purpose - This study aims to examine the impact of CEO equity-based compensation (EBC) on employee wages. It also examines the impact of EBC on average employee wages in different industries and business cycles. Design/methodology/approach - The authors use pay-performance sensitivity (PPS) to measure for CEO EBC and run OLS models with year and industry dummies. As many firms do not report labor expenses, the authors conduct the two-step analysis as inHeckman (1979)to overcome the potential selection bias. Findings - The authors find that CEOs with higher EBC tend to pay their employees lower wages. They also find that such an impact is more evident in non-technology firms than in technology firms. Finally, they find that CEOs with higher PPS are more likely to depress employee wages when the business cycle shows a downturn. Originality/value - No study examines the impact of EBC on employee wages directly to date. The authors add to the existing stream of literature regarding employee wages and managerial compensation. Hence, they purport that the findings support existing literature suggesting EBC contributes to, rather than alleviates, the classic agency conflict. Finally, the evidence suggests an unexplored manifestation of that agency conflict and an additional source of CEO rent extraction.

Keywords: Average employee wages; Equity-based compensation; Pay-performance sensitivity (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-04-2017-0065

DOI: 10.1108/RAF-04-2017-0065

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