Working Paper No. 655

Do Entrenched Managers Pay Their Workers More?

Published: December 2, 2005; revised March 19, 2007Pages: 41Keywords: Corporate Governance; Agency Problems; Private Benefits; Matched Employer-Employee Data; Wages JEL-codes: G32; G34; J31; J33

Do Entrenched Managers Pay Their Workers More? Henrik Cronqvist, Fredrik Heyman, Mattias Nilsson, Helena Svaleryd and Jonas Vlachos


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 more cash flow rights mitigate such behavior. These findings do not seem to be driven by productivity differences, and are unaffected by a series of robustness tests. Further evidence suggests that higher pay comes with non-pecuniary private benefits for a CEO, such as lower-effort wage bargaining with aggressive workers and their unions. Moreover, we find that entrenched CEOs pay more to employees who are closer to them in the firm’s hierarchy, such as CFOs, vice-presidents and other executives, and white-collar workers who work at or geographically close to the corporate headquarters. The evidence is consistent with an agency model in which managers have a taste for both profits and highly paid employees, and implies that corporate governance can be of importance for labor market outcomes such as workers’ pay.

Fredrik Heyman

Contact

Ph: +46 8 665 4537
fredrik.heyman@ifn.se

Jonas Vlachos

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Ph: +46 8 16 30 46
Mob: +46 70 893 3240
jonas.vlachos@ne.su.se

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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