The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees
49 Pages Posted: 16 Apr 2018 Last revised: 21 Dec 2018
Date Written: December 20, 2018
Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize employees who 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. Moreover, we control 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 relative wealth concerns of employees are an important 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: Suggested Citation