Abstract
How does competition for high-skilled workers affect the design and financing of compensation? This paper shows that such competition has three main effects. It increases the cost of offering equity-based compensation by exacerbating the risk of contagious worker turnover. Simultaneously, competition shifts compensation structure toward equity-based pay, as that helps attract workers when firms' prospects are uncertain. Financing also changes, as equity-based pay requires no external financing. By contrast, firms whose bargaining power is not eroded by competition prefer deferred fixed compensation backed by credit lines. Capital and compensation structure choices may distort the efficient matching between workers and firms.
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