Worker Runs

Abstract

The voluntary departure of hard-to-replace skilled workers worsens firm prospects, which can prompt additional departures. We develop a model in which firms design compensation to limit the risk of such "worker runs." To achieve cost-efficient retention, firms combine fixed wages with dilutable compensation --- such as vesting equity or bonus pools --- that pays remaining workers more when others leave but gets diluted otherwise. Compensating (identical) workers with differently-structured compensation --- that is, with a different mix of output-dependent and -independent pay --- can further help mitigate the worker run problem by ensuring a critical retention level in a cost-efficient way.

Keywords: Compensation structure of non-executive employees, high-skilled employees, contagious turnover, worker runs, dilutable compensation, asymmetric compensation, time- and performance-vesting, retention bonuses.

JEL Classification: G32, M52, J54, J33