Abstract
This paper studies the impacts of incentive compensation to top five executives on employee wages. We employ pay-performance sensitivity to measure executive incentive compensation. Using the sample during 1992 – 2017, we find that executive compensation has negative impacts on employee wages. In addition, we examine the impacts of executive incentive compensation on employee wages in different industries and find that the impacts are more severe in technology firms than in non-technology firms. Finally, we show that the executives with higher incentive compensation are more likely to suppress employee wages in financially safe firms. Our results suggest that while top management teams are compensated as a team on average, they are compensated as isolated individuals on other aspects. Furthermore, firm performance may not always improve in the long run by granting high incentive compensation to top executives.
Highlights
Agency conflicts between shareholders and managers with little or no ownership are inherent in modern corporations and can lead managers to divert the firm’s resources for their own benefits (Jensen and Meckling, 1976)
We find that Equity-based compensation (EBC) to top five executives provided by pay-performance sensitivity (PPS) has significantly negative impacts on employee wages, which is consistent with the results by Graefe-Anderson et al (2018)
Wage is the natural log of average employee wages; PPS is the natural log of the total PPS of the top five executives; pay-volatility sensitivity (PVS) is the natural log of the total PPS of the top five executives of the firm; Size is the firm size; Leverage is the firm market leverage ratio; Average sales is the natural log of the average sales per employee; MTB is market-to-book ratio of the firm; PCI is the physical capital intensity of the firm; The sample contains 35,512 firm-year observations during 1992 - 2017; Boldface indicates significance at 1% level
Summary
Agency conflicts between shareholders and managers with little or no ownership are inherent in modern corporations and can lead managers to divert the firm’s resources for their own benefits (Jensen and Meckling, 1976). As firms subsequently increase executive incentives, there are concerns about executives, who might utilize incentive compensation for their own interests at the expense of other stakeholders (Sappington & Stiglitz, 2004) Another stream in executive compensation study focuses on a perspective that top executives are compensated as a team or as individuals. Li (2018) support the perspective that top management teams are compensated as teams Other studies such as Pagano and Volpin (2005) and Bertrand and Mullainathan (2003) examine the relationship between employee wages and managerial powers. Graefe-Anderson et al (2018) show that the CEO compensation policy has impacts on shareholders’ wealth as well as on employee wages. We find that EBC to top five executives provided by PPS has significantly negative impacts on employee wages, which is consistent with the results by Graefe-Anderson et al (2018).
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