The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees

The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees

Ingolf Dittmann, Christoph Schneider, Yuhao Zhu

Series number :

Serial Number: 
559/2018

Date posted :

April 17 2018

Last revised :

August 14 2020
SSRN Share

Keywords

  • CEO compensation • 
  • relative wealth concerns • 
  • employee wages • 
  • inequality aversion • 
  • pay inequality

Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize that employees have relative wealth concerns and compare their wage to the CEO’s pay. Using German establishmentlevel wage data, we indeed show that employee wages are increasing in CEO compensation.

We use a regulatory shock to the public observability of German CEO compensation and establish causality by using a difference-in-difference approach. We find that the envious behavior is geared to CEOs themselves rather than to the management team. We separate CEO pay in expected and abnormal pay, and find that the expected pay doesn’t explain the envious behavior. This is in line with the public attention playing the key role of inciting envy among employees. Our findings suggest that relative wealth concerns of employees are a driver of wages and significantly increase the costs of executive compensation.

Authors

Prof.
Real name:
Christoph Schneider
Tilburg University
Real name:
Yuhao Zhu