Financing Skilled Labor
WFA 2019 Meetings Paper
45 Pages Posted: 7 Aug 2018 Last revised: 8 Mar 2021
Date Written: March 8, 2021
How does competition for high-skilled workers affect the design and financing of compensation? This paper shows that such competition has three main effects. It increases the cost of offering equity-based compensation by exacerbating the risk of contagious worker turnover. Simultaneously, competition shifts compensation structure toward equity-based pay, as that helps attract workers when firms' prospects are uncertain. Financing also changes, as equity-based pay requires no external financing. By contrast, firms whose bargaining power is not eroded by competition prefer deferred fixed compensation backed by credit lines. Capital and compensation structure choices may distort the efficient matching between workers and firms.
Keywords: financing wages, wage structure of non-executive employees, worker runs, worker bargaining power, noncompetition agreements
JEL Classification: G32, M52, J54, J33
Suggested Citation: Suggested Citation