Working Paper: CEPR ID: DP17419
Authors: Florian Hoffmann; Vladimir Vladimirov
Abstract: The voluntary departure of hard-to-replace skilled workers worsens firm prospects, thus, increasing remaining workers' incentives to leave. We develop a model of collective turnover in which firms design compensation to limit the risk of such "worker runs." To achieve cost-efficient retention, firms may use fixed or dilutable variable pay -- such as stock option/bonus pools -- that promises remaining workers more when others leave but gets diluted otherwise. The optimal mix of fixed and dilutable pay depends on firms' relative risk exposure and their financial constraints. Compensating (identical) workers differently and financing investments with debt can improve collective retention.
Keywords: compensation; structure of non-executive employees; high-skilled employees; contagious turnover; worker runs; worker bargaining power; financing labor
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 |
|---|---|
| compensation design (M52) | worker retention (J63) |
| worker departure (J63) | contagious turnover (J63) |
| contagious turnover (J63) | worker retention (J63) |
| dilutable pay structures (J33) | worker retention (J63) |
| compensation design (M52) | likelihood of worker run (J63) |
| perceived value of on-the-job compensation (J33) | worker retention (J63) |
| external market conditions (L19) | worker options (J29) |
| worker departure (J63) | expectations of remaining workers (J29) |