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

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