nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2017‒07‒30
eight papers chosen by
Patrick Kampkötter
Eberhard Karls Universität Tübingen

  1. Rethinking Measurement of Pay Disparity and its Relation to Firm Performance By Ethan Rouen
  2. Do Mincerian Wage Equations Inform How Schooling Influences Productivity? By Christian Groth; Jakub Growiec
  3. Contracting with Feedback By Bo Sun
  4. Conditions at work: how actual and expected working conditions drive perception By Simona Cicognani; Martina Cioni; Marco Savioli
  5. Changes in Executive Remuneration after Technology Bubble By Suwina Cheng
  6. Allocation of Bonuses Based on Performance Based Reward System By Ipek Gursel Tapki
  7. Knowledge Diffusion Within and Across Firms By Jeremy Lise; Guido Menzio; Gordon Phillips; Kyle Herkenhoff
  8. Corporate monitoring mechanism and corporate governance influence CEO compensation level: Evidence from non-financial firms of Pakistan By Anam Tasawar

  1. By: Ethan Rouen (Harvard Business School, Accounting and Management Unit)
    Abstract: I develop measures of firm-level pay disparity and examine their relation to firm accounting performance. Using comprehensive compensation data for a large sample of firms, I find no statistically significant relation between the ratio of CEO-to-mean employee compensation and performance. I next create empirical models that allow me to separate the components of CEO and employee compensation explained by economic factors from those that are not, and use these models to estimate explained and unexplained pay disparity. After validating my estimate of unexplained pay disparity as a proxy for pay fairness, I find robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance. Additional tests show that the negative relation between unexplained disparity and firm performance is driven by firms where both the CEO is overpaid and employees are underpaid, and is more pronounced for firms with weak corporate governance and high employee turnover.
    Keywords: pay disparity, pay ratio, CEO pay ratio, income inequality
    Date: 2017–07
  2. By: Christian Groth; Jakub Growiec
    Abstract: We study the links between the Mincerian wage equation (the cross-sectional relationship between wages and years of schooling) and the human capital production function (the causal effect of schooling on labor productivity). Based on a stylized Mincerian general equilibrium model with imperfect substitutability across skill types and ex ante identical workers, we demonstrate that the mechanism of compensating wage differentials renders the Mincerian wage equation uninformative for the human capital production function. Proper identification of the human capital production function should take into account the equilibrium allocation of individuals across skill types.
    Keywords: Mincerian wage equation, Human capital production function, Skill distribution, Compensating wage differentials, Golden rule of skill formation
    JEL: E24 I26 J24
    Date: 2017–07–17
  3. By: Bo Sun (Federal Reserve Board)
    Abstract: We study the effect of financial market conditions on managerial compensation structure. First, we analyze the optimal pay-for-performance in a model in which corporate decisions and firm value are both endogenous to trading due to feedback from information contained in stock prices. In a less frictional financial market, the improved information content of stock prices helps guide managerial decisions, and this information substitutes out part of direct incentive provision in compensation contracts. Thus, the optimal pay-for-performance is lowered in response to reductions in market frictions. Second, we test our theory using two quasi-natural experiments and find evidence that is consistent with the theory. Our results indicate that the financial market environment plays an important role in shaping CEO compensation structure.
    Date: 2017
  4. By: Simona Cicognani (Department of Economics, University of Verona, Italy; The Rimini Centre for Economic Analysis); Martina Cioni (Department of Economics and Statistics, University of Siena, Italy); Marco Savioli (Department of Economics, University of Salento, Italy; The Rimini Centre for Economic Analysis)
    Abstract: Working conditions exert a major influence on accidents and illnesses at work as well as on job satisfaction and health, yet very little research has examined the determinants of working conditions. By exploiting the Italian Labour Force Survey, this paper provides evidence on the underlying factors affecting working conditions. It provides a behavioural interpretation of the results, which stems from the discrepancy between actual and expected working conditions. Workers declare their perceived working conditions influenced by the difference between the actual and the expected working conditions. Variables concerning personal characteristics, such as gender, education and being employed in the first job, shift expectations about working conditions and accordingly perceived working conditions. On the contrary, variables related to work characteristics, such as working full time, with shifts and in a large place, affect actual and thus perceived working conditions (negatively).
    Keywords: Working conditions, Expectations, Perceptions, Actual conditions, Job satisfaction
    JEL: D84 J24 J28
    Date: 2017–07
  5. By: Suwina Cheng (Lingnan University)
    Abstract: The study examines top executive Remuneration in UK high-technology firms in an attempt to identify and understand any changes in the structure of the pay mechanism evident after the global technology market crisis at the end of the twentieth century. The results show that the relation between executive pay and market performance has weakened and that the fixed components in the pay package in those companies have increased post-crisis. These changes have likely served to compensate executives for the increased risk associated with equity-based compensation rather than to redress any perceived problems with executive incentives pre-crisis. Moreover, we also confirm a significant and negative association between executive pay and block shareholdings after the market adjustment. These findings suggest that shareholders strengthened their role of monitoring executive pay in the wake of this exogenous economic shock.
    Keywords: Corporate governance, CEO compensation, Financial crisis, High-technology firms
    JEL: G30 M12
    Date: 2017–07
  6. By: Ipek Gursel Tapki (Kadir Has University)
    Abstract: We consider the problem of allocating bonuses among workers in companies. For this allocation, most companies use a performance based reward system. At the end of each year, there is a performance appraisal conducted by the Human Resources department of each company. In this process, employers evaluate employees, and employees evaluate superiors. Usually these evaluations are conducted using some quantitative evaluation forms and the average score in the evaluation determines the performance of the workers. Based on their performances, some workers receive bonuses and some do not. Usually companies set an eligibility criterion for bonuses: if a worker?s performance score is above certain level, then he or she is eligible to receive a bonus. It is also true that each company has a limited budget that it would like to allocate among its workers as bonuses. While allocating this budget, no company allocates a bonus of more than some multiple of the monthly salary of the worker. Note that the salaries of the workers may differ: a senior worker most likely receives more salary than a newly employed worker. Therefore, the maximum amount of bonus each worker can receive may differ. We study systematic way of allocating the budget of a company among the workers whose performance was sufficiently good (above the eligibility level). Since within each company there are different departments, and each worker works under a certain department, we can define a two-step procedure for allocating the bonus budget of a company among its workers: first the company allocates the money among departments, and later each department allocates the money it receives among its workers. We call these systematic way of allocations as allocation rule and we consider rules satisfying good properties, such as efficiency, fairness, and strategy proofness. We characterize rules satisfying those properties. JEL classification: D70, D78
    Keywords: allocation of bonuses, eligibility, reward system, fairness, efficiency
    JEL: D70 D71
    Date: 2017–05
  7. By: Jeremy Lise (University of Minnesota); Guido Menzio (University of Pennsylvania and NBER); Gordon Phillips (Dartmouth University); Kyle Herkenhoff (University of Minnesota)
    Abstract: We develop a large-firm sorting model to study the way knowledge diffuses within and across firms. We build on \citet{shimer2000assortative} and allow for workers within a firm to influence each other's knowledge. In particular, we extend the framework to allow for a given worker's human capital to influence the future path of their coworker's human capital, and vice versa. In contrast to standard sorting models, a firm's type is no longer exogenous; it is given by the distribution of human capital of its workers. Firms are created by workers spinning off and recruiting their own employees which is an important driver of knowledge diffusion. We then use micro wage data and job mobility patterns from the LEHD (the LEHD covers all private sector jobs in the US), as well as startup patterns from the Integrated LBD, to separately estimate the knowledge diffusion process and the degree of worker complementarities in production. The data yield 5 new facts: (1) the number of coworkers has an [X] effect on an individual's wage, (2) the lowest wage coworker has an [X] effect on an individual's wage, (3) the highest wage coworker (superstar) has an [X] effect on an individual's wage, (4) workers with [X] individual wages and [X] coworker wages are more likely to start their own business (explicitly controlling for access to credit), and (5) there are [X] sorting patterns, i.e. workers with higher wages are more likely to move to firms that pay [X] average wages. We use fact (5) to estimate worker complementarities in production and we use facts (1) through (4) to discipline the knowledge diffusion process. We then use the estimated model to study various counterfactuals, including the way labor market distortions, such as firing taxes, impede mobility and affect the diffusion of knowledge.
    Date: 2017
  8. By: Anam Tasawar (University of Gujrat)
    Abstract: Managerial compensation is strategically pivotal and practically interesting to manage as it has long-lasting ties with firm?s performance. It is regarded as most crucial tool to attract and retain the top-notched professionals to achieve the firm?s strategic and long term objectives. The executives tends to support their comparatively higher level of compensation sometimes, may be at the cost of priority to firm?s value and interest of principles. In corporate finance literature, this phenomenon of opportunistic behavior has been controlled by various monitoring mechanisms. The new spectacle is apposite in Pakistani financial institutions that have no more strict application of compensation regulation. The current study empirically evaluates the impact of different corporate governance attributes such as institutional shareholders? activism, independence of audit committee and board structure and block holding on the level of compensation paid to CEO of Pakistani listed firms for a period of 2007-2013. All these personas worked as monitoring mechanism for CEOs is scrutiny through stepwise regression. The results found that independent audit committee and board of director along with dual CEO structure and greater family ownership are helpful in mitigating the higher level of CEO compensation with is in align with the agency cost hypothesis. Moreover, higher financial institutional ownership found positively related to CEO compensation which is in accordance with the strategic alliance hypothesis. However, the role of institutions in deciding CEO compensation becomes negative in case of family firms as compared to non-family firms.
    Keywords: Managerial Compensation, Corporate Governance, monitoring mechanism
    JEL: G30 G39
    Date: 2017–07

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