Agency and Compensation: Evidence from the Hotel Industry

Abstract

We examine how agency problems in the workplace interact with compensation policies by taking advantage of the structure of the hotel industry, in which many chains have both company managed and franchised properties. As residual claimants on their properties’ profits, franchisees have stronger incentives to monitor employees than managers in company managed hotels. Exploiting this variation and using rich, longitudinal data on the hotel industry, we estimate differences in wages and human resource practices across company managed and franchised hotels within chains as well as within individual hotels as they change organizational form. Our results suggest that the timing of pay and the propensity to use performance-based incentives relate to the extent of agency problems within establishments.

Keywords: Agency, Compensation, Franchising, Firm Organizational Form, Services

JEL Classification: J31, J41, L23, L83