Working Paper: CEPR ID: DP15751
Authors: Vladimir Vladimirov
Abstract: How does competition for high-skilled workers affect the design and financing of compensation? The paper shows that competition affects compensation structure by leading to more equity-based pay. Such compensation attracts workers by helping them extract higher expected pay when uncertain about firm value. Equity-based compensation reduces firms' need for external financing, but it increases retention risk. Specifically, by making workers dependent on the retention of other workers, equity-based compensation increases the risk that worker turnover becomes contagious. To lower their compensation costs and improve retention, firms with stronger bargaining power favor deferred fixed compensation backed by credit lines.
Keywords: financing; wages; compensation structure of non-executive employees; high-skilled employees; contagious turnover; worker runs; worker bargaining power
JEL Codes: G32; M52; J54; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition for high-skilled workers (J69) | Adoption of more equity-based compensation structures (M52) |
| Equity-based compensation (M52) | Reduction in firms' need for external financing (G32) |
| Equity-based compensation (M52) | Increase in retention risks (G33) |
| Equity-based compensation (M52) | Contagious turnover (J63) |
| Departure of one worker (J63) | Departure of other workers (J63) |
| Stronger bargaining power (L14) | Preference for deferred fixed compensation (J33) |
| Deferred fixed compensation (J33) | Mitigation of turnover contagion risk (J63) |