Do Entrenched Managers Pay Their Workers More?
University of Miami - Department of Finance
Research Institute of Industrial Economics (IFN)
U.S. Securities and Exchange Commission
Stockholm University - Department of Economics
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
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.
Number of Pages in PDF File: 45
Keywords: Corporate governance, agency problems, private benefits, matched employer-employee data, wages
JEL Classification: G32, G34, J31
Date posted: May 25, 2006 ; Last revised: September 11, 2008