The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees

52 Pages Posted: 16 Apr 2018 Last revised: 7 Jul 2020

See all articles by Ingolf Dittmann

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Christoph Schneider

Tilburg University - Department of Finance

Yuhao Zhu

Erasmus University Rotterdam (EUR)

Date Written: June 24, 2020

Abstract

Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize that employees have relative wealth concerns and compare their wage to the CEO's pay. Using German establishment-level wage data, we indeed show that employee wages are increasing in CEO compensation. We use a regulatory shock to the public observability of German CEO compensation and establish causality by using a difference-in-difference approach. We find that the envious behavior is geared to CEOs themselves rather than to the management team. We separate CEO pay in expected and abnormal pay, and find that the expected pay doesn't explain the envious behavior. This is in line with the public attention playing the key role of inciting envy among employees. Our findings suggest that relative wealth concerns of employees are a driver of wages and significantly increase the costs of executive compensation.

Keywords: CEO compensation, relative wealth concerns, employee wages, inequality aversion, pay inequality

JEL Classification: D63, G02, G34, J31

Suggested Citation

Dittmann, Ingolf and Schneider, Christoph and Zhu, Yuhao, The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees (June 24, 2020). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 559/2018, Available at SSRN: https://ssrn.com/abstract=3160228 or http://dx.doi.org/10.2139/ssrn.3160228

Ingolf Dittmann (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 4081283 (Phone)
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Tinbergen Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Christoph Schneider

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Yuhao Zhu

Erasmus University Rotterdam (EUR)

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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