Negotiating Compensation

Florian Hoffmann and Vladimir Vladimirov

No 17418, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We investigate compensation design in tight labor markets. With private information about firm productivity, firms prefer competing for workers by raising fixed wages. However, workers in better bargaining positions often prefer negotiating for higher bonuses or option pay. We characterize when such differences in preferred compensation structure occur and show that they determine whether workers extract higher compensation by negotiating as opposed to attracting additional job offers. Our analysis of negotiations and competition with endogenous compensation structure has implications for firms' external financing needs and investor base and extends to other applications such as mergers and acquisitions.

Keywords: Competition for workers; Negotiations; Financing wages; Compensation structure of non-executive employees; High-skilled employees (search for similar items in EconPapers)
JEL-codes: G32 J33 J54 M52 (search for similar items in EconPapers)
Date: 2022-06
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