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

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: December 20, 2018

Abstract

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

Dittmann, Ingolf and Schneider, Christoph and Zhu, Yuhao, The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees (December 20, 2018). 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 ECARES ULB CP 114
B-1050 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

Register to save articles to
your library

Register

Paper statistics

Downloads
113
Abstract Views
580
rank
240,601
PlumX Metrics