How Do Labor Representatives Affect Incentive Orientation of Executive Compensation?

31 Pages Posted: 22 Aug 2016

See all articles by Katharina Dyballa

Katharina Dyballa

Technical University of Dortmund

Kornelius Kraft

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Abstract

Contrary to previous literature we hypothesize that labor's interest may well – like that of shareholders – aim at securing the long-run survival of the firm. Consequently, employee representatives on the supervisory board could well have an interest in increasing incentive-based compensation to avoid management's excessive risk taking and short-run oriented decisions. We compile unique panel data on executive compensation over the periods 2006 to 2011 for 405 listed companies and use a Hausman-Taylor approach to estimate the effect of codetermination on the compensation design. Finally, codetermination has a significantly positive effect on performance-based components of compensation, which supports our hypothesis.

Keywords: executive compensation, board representation, principal-agent theory, corporate finance, Hausman-Taylor

JEL Classification: J52, L20, G32, M12, C33

Suggested Citation

Dyballa, Katharina and Kraft, Kornelius, How Do Labor Representatives Affect Incentive Orientation of Executive Compensation?. IZA Discussion Paper No. 10153, Available at SSRN: https://ssrn.com/abstract=2826987

Katharina Dyballa (Contact Author)

Technical University of Dortmund ( email )

Emil-Figge-Straße 50
Dortmund, 44227
Germany

Kornelius Kraft

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany
+49 231 755-3152 (Phone)
+49 231 755-3155 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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