Do Entrenched Managers Pay Their Workers More?

45 Pages Posted: 25 May 2006 Last revised: 11 Sep 2008

Henrik Cronqvist

University of Miami - Department of Finance

Fredrik Heyman

Research Institute of Industrial Economics (IFN)

Mattias Nilsson

U.S. Securities and Exchange Commission

Helena Svaleryd

Uppsala University

Jonas Vlachos

Stockholm University - Department of Economics

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Date Written: November 20, 2007

Abstract

Analyzing a large panel that matches public firms with worker-level data, we find that managerial entrenchment affects workers' pay. CEOs with more control pay their workers more, but financial incentives through ownership of cash flow rights mitigate such behavior. These findings do not seem to be driven by productivity differences, and evidence around an exogenous shift in labor market relations suggests a causal interpretation of our findings. Entrenched CEOs pay more to employees (i) closer to the CEO in the corporate hierarchy, such as CFOs, division vice-presidents and other top-executives, (ii) geographically closer to the corporate headquarters, and (iii) associated with aggressive and conflict-inclined unions. The evidence is consistent with entrenched CEOs paying higher wages to enjoy non-pecuniary private benefits such as lower effort wage bargaining and improved social relations with certain employees. More generally, our results show that managerial ownership and corporate governance can play an important role for labor market outcomes such as employee compensation.

Keywords: Corporate governance, agency problems, private benefits, matched employer-employee data, wages

JEL Classification: G32, G34, J31

Suggested Citation

Cronqvist, Henrik and Heyman, Fredrik and Nilsson, Mattias and Svaleryd, Helena and Vlachos, Jonas, Do Entrenched Managers Pay Their Workers More? (November 20, 2007). EFA 2006 Zurich Meetings Paper; AFA 2007 Chicago Meetings Paper; Fisher College of Business Working Paper No. 2007-03-010; Charles A. Dice Center Working Paper No. 2007-7. Available at SSRN: https://ssrn.com/abstract=845844 or http://dx.doi.org/10.2139/ssrn.845844

Henrik Cronqvist (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
(305) 515-5898 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Fredrik Heyman

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

HOME PAGE: http://www.ifn.se

Mattias Nilsson

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
United States

Helena Svaleryd

Uppsala University ( email )

P.O. Box 513
Uppsala, 75120
Sweden

Jonas Vlachos

Stockholm University - Department of Economics ( email )

Stockholm, 10691
Sweden

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