Labor Market Immobility and Incentive Contract Design
58 Pages Posted: 30 Nov 2018 Last revised: 8 Nov 2019
Date Written: November 20, 2018
This paper studies how a shock to labor market mobility affects the design of top managers’ incentive contract. We find that restricting mobility causes firms to increase the convexity of managers’ equity holdings and lengthen the vesting schedules of new option grants. We also find that the likelihood of repricing becomes more sensitive to bad luck after the shock. The results are consistent with a prominent yet little tested theory on motivating innovation, suggesting that restricting mobility leads firms to incentivize managers to pursue more innovation. Overall, this paper provides causal evidence that labor markets affect incentive contract design.
Keywords: Labor market immobility, Managerial compensation, Human capital, Innovative incentive
JEL Classification: G30, G34, J33, M52, M54
Suggested Citation: Suggested Citation