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  5. Corporate Finance: Compensation and Agency
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Corporate Finance: Compensation and Agency

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon C
Hosted By: American Finance Association
  • Chair: Gustavo Manso, University of California-Berkeley

Firms with Benefits? Nonwage Compensation and Implications for Firms and Labor Markets

Paige Ouimet
,
University of North Carolina-Chapel Hill
Geoffrey Tate
,
University of Maryland

Abstract

Nonwage benefits have become increasingly important and now represent 30% of total compensation (Bureau of Labor Statistics, 2021). Using administrative data on health insurance, retirement, and leave benefits, we find within-firm variation accounts for a dramatically lower percentage of total variation in benefits than in wages. We also document sharply higher between-firm variation in nonwage benefits than in wages. We argue that this pattern can be a consequence of nondiscrimination regulations, fairness concerns and the high administrative burden of managing too many or complex plans. Consistent with this mechanism, we show that the presence of high-wage workers in unrelated divisions of a firm as well as workers hired in high-benefit local labor markets positively predicts their colleagues’ benefits, controlling for occupation, wages, state, and industry. This dynamic has implications for employee turnover. We find that the resulting high benefits reduce employee departures, particularly among low-wage workers, for whom the benefits comprise a larger percentage of total compensation. We also find evidence that firms with more generous nonwage benefits reduce their reliance on low-wage workers more than low-benefit peers, suggesting that constraints on the provision of benefits affect the distribution of human capital across firms. Moreover, firms with relatively more generous benefits tend to have lower market valuation ratios, consistent with the existence of costs associated with providing more equal non-wage benefits within a firm.

Competition and Executive Compensation: Evidence from Pharmaceutical Breakthrough Designations

Jon A. Garfinkel
,
University of Iowa
Mosab Hammoudeh
,
University of New Orleans
Steve Irlbeck
,
University of New Hampshire
Erik Lie
,
University of Iowa

Abstract

We examine the effect of competitive shocks on executive compensation and innovation in the pharmaceutical sector. The pharmaceutical sector is ideal for testing the joint theories of Arrow (1962) and Manso (2011) because innovation is paramount and periodic shocks to the competition space are common. Breakthrough therapy designations (BTDs), which expedite the approval of promising therapies, represent significant competitive shocks that are exogenous to rival firms' compensation structures. We find that when a pharmaceutical firm receives a BTD, rival firms respond by increasing risk-incentive pay via option grants in the subsequent year. This effect is robust to various econometric specifications and various ways of identifying rival firms. Furthermore, the observed effect is most pronounced for the most afflicted rivals (i.e., the rivals that exhibit the worst stock price reaction to the BTD) and for CEOs relative to other executives. We also examine if rival firms respond to the increase in executive stock options by shifting resources to riskier innovation. The evidence suggests that afflicted rivals escalate the developments of new drugs, initiate more drug projects using new technologies, and are more inclined to take on projects with lengthy development times. Overall, our results corroborate theoretical models wherein (i) firms facing competitive pressures optimally intensify innovation, and (ii) stock options encourage executives to undertake such innovation.

Process Intangibles and Agency Frictions

Hui Chen
,
Massachusetts Institute of Technology
Ali Kakhbod
,
University of California-Berkeley
Maziar Kazemi
,
Arizona State University
Hao Xing
,
Boston University

Abstract

Intangible capital can be used to create new goods and services (product intangibles) or to improve the efficiency of the firm (process intangibles). We report and study a new empirical fact: Executive and skilled labor pay is increasing in firm process intensity (the fraction of intangibles corresponding to process intangibles). We rationalize this fact in a dynamic principal-agent model, with the optimal contract uncovering process intensity's direct and indirect effect on compensation. The direct effect is a level effect: Higher process intensity increases the returns to shirking. The indirect effect is a slope effect: Higher complementarity between process intangibles and physical capital investment increases the agent's hold-up power over the firm for any level of process intensity. We verify these effects in the data. Importantly, we show that these effects are present in executive compensation and in the wages of highly skilled innovative employees, which we can measure using proprietary granular vacancy posting data from a labor-market data firm. In our baseline specification, a one standard deviation increase in process intensity is associated with an 8% increase in executive pay and a 3% increase in skilled labor wages relative to industry peers.

ESG-linked Pay Around the World —Trends, Determinants, and Outcomes

Sonali Hazarika
,
CUNY-Baruch College
Aditya Kashikar
,
University of Massachusetts-Boston
Lin Peng
,
CUNY-Baruch College
Ailsa Roell
,
Columbia University
Yao Shen
,
CUNY-Baruch College

Abstract

We conduct a large-scale global study of ESG-linked pay for major firms that make up 85% of the market capitalization across 59 countries. We find that the pay adoption is higher for firms in extractive and utility industries, in countries that value individualism and femininity, have stronger shareholder protections, and are of civil legal origin, and for large firms or firms with high return to assets. The adopters experience better future social and financial performances. Exploiting a regulatory shock that mandates corporate ESG disclosure, we show that the effect of ESG-linked pay on performances is likely causal and suggest employee satisfaction as a channel.

Discussant(s)
Jessica Jeffers
,
HEC Paris
Moqi Groen-xu
,
London School of Economics
Nicolas Crouzet
,
Northwestern University
Alex Edmans
,
London Business School
JEL Classifications
  • G3 - Corporate Finance and Governance