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

47 Pages Posted: 16 Apr 2018 Last revised: 20 Mar 2024

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

University of Münster - Finance Center Münster

Yuhao Zhu

Erasmus University Rotterdam (EUR)

Date Written: March 14, 2024

Abstract

We hypothesize that employees have relative wealth concerns and compare their wages to the CEO's pay. Using German establishment-level wage data, we show that employee wages are increasing in CEO compensation. We use a regulatory change that required individual executive compensation disclosure as an exogenous shock. We find that the envious behavior is geared toward CEOs rather than toward the management team. Employee wage increases are particularly strong when press articles cite critical statements of labor representatives about excessive executive compensation. Our findings suggest that employees' envious behavior are drivers 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 (March 14, 2024). 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)
+31 10 4089165 (Fax)

HOME PAGE: http://people.few.eur.nl/dittmann/

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

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Yuhao Zhu

Erasmus University Rotterdam (EUR)

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

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