The Effect of Outside Directors’ Equity Compensation on Labor Investment

Abstract

A significant increase of outside director equity compensation (ODEC) in the past two decades has attracted much debate. Against this backdrop, this study examines how ODEC affects several aspects of corporate labor investments. Using a sample of U.S. firms during the period from 2006 to 2019, we find that ODEC is associated with a smaller absolute difference between the actual and expected net hiring, i.e., higher efficiency in labor investment. Our findings are robust to alternative proxies for ODEC and labor investment efficiency, and endogeneity tests. In addition, we find that the impact of ODEC on labor investment efficiency is less (more) pronounced for firms with greater institutional ownership or CEO ownership (human capital-intensive and complex firms). We also find that ODEC increases the timeliness of labor adjustment. Finally, we provide evidence that equity compensation incentivizes outside directors to reduce employee injuries and increase pro-social employee policies, which can potentially improve firm value in the long run. Overall, our findings contribute to the debate on the effectiveness of ODEC by showing its impact on labor investments.

Keywords: Outside Director Equity Compensation, Labor Investment, Corporate Governance, Employee Injuries, Pro-social Employee Policies

JEL Classification: G34, J23, J28