Labor Market Immobility and Incentive Contract Design

58 Pages Posted: 30 Nov 2018 Last revised: 8 Nov 2019

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Lai Wei

Lingnan University - Department of Finance and Insurance

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: November 20, 2018

Abstract

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

Lin, Chen and Wei, Lai and Yang, Nan, Labor Market Immobility and Incentive Contract Design (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3289225 or http://dx.doi.org/10.2139/ssrn.3289225

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lai Wei (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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