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 use fixed wages and dilutable compensation --- such as vesting equity or bonus pools --- that pays remaining workers more when others leave but gets diluted otherwise. The optimal degree of dilution and its implementation depend on the firm's production technology, relative risk exposure, and financial constraints. Compensating workers with differently-structured compensation can further mitigate worker runs by ensuring a critical retention level.

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