White Collar Incentives
51 Pages Posted: 17 Sep 2012 Last revised: 3 Oct 2012
Date Written: September 1, 2012
Using novel compensation data on white collar employees (WCE) in large, public U.S. firms, we examine their explicit financial incentives and implicit incentives arising from promotions and labor market opportunities. We find that employees with stronger (weaker) implicit incentives receive more (less) retention incentives measured by long-term equity-based incentives. We also find a dynamic relation between the use of long-term equity-based incentives and employee tenure: long-term equity-based incentives are used intensively in the early years of WCE’s tenure to help attract and retain them in the firm. As employees’ firm-specific human capital increases over time limiting their mobility in the external labor market, the use of long-term equity-based incentives becomes less intensive. Finally, we find that WCE incentives reflect lower horizontal pay disparity in functions where productivity depends significantly on intra-team coordination and information sharing, such as R&D. The overall findings suggest that firms fine-tune explicit incentives to account for differences in implicit incentives arising from job and individual employee characteristics.
Keywords: White collar employee, Implicit incentives, Promotion, Career concerns, Firm-specific human capital, Pay disparity
JEL Classification: M41, M51, M52, M55
Suggested Citation: Suggested Citation