The Real Cost of CEO Compensation: The Effect of Behindness Aversion of Employees
45 Pages Posted: 16 Apr 2018
Date Written: April 10, 2018
Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize employees who are behindness averse 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 establish causality by using a difference-in-difference approach and controlling for firm and establishment fixed effects. When CEO compensation increases by 1%, the median employee’s wage increases by about 0.04%. Our findings suggest that behindness aversion of employees is an important driver of wages and significantly increases the costs of executive compensation.
Keywords: CEO compensation, behindness aversion, employee wages, inequality aversion, pay inequality
JEL Classification: D63, G02, G34, J31
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