Are CEOs the Only Residual Claimants? Estimation of the Performance Elasticity of Per-Employee Compensation

Bruce Rayton

Industrial Organization from University Library of Munich, Germany

Abstract: This paper evaluates the intensity of the value-maximization incentives for average employees generated through wage, salary, and bonus mechanisms. This is accomplished through estimation of the elasticity of average employee hourly compensation with respect to changes in firm performance. This performance elasticity indicates the degree of alignment between employee and shareholder objectives, and it can also be interpreted as a residual income claim for employees. The estimated performance elasticity for the full sample of firms is indistinguishable from a CEO performance elasticity of 0.1 published in Coughlan and Schmidt (1985). The estimated performance elasticity is 0.152 in small firms and indistinguishable from zero in large firms. While CEO rewards are larger than the rewards of average employees in absolute terms, these rewards represent comparable fractions of income for both the CEO and the average employee. Firms use wage, salary and bonus adjustments to direct approximately 4.1 percent of firm value increases to employees. These results indicate that average employees hold a significant stake in firm performance.

Keywords: incentives; agency costs; pay-performance sensitivities; profit-sharing (search for similar items in EconPapers)
JEL-codes: J33 L14 (search for similar items in EconPapers)
Date: 1994-12-16, Revised 1996-03-25
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