The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees
58 Pages Posted: 16 Apr 2018 Last revised: 13 Aug 2020
Date Written: June 24, 2020
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 establishment-level 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.
Keywords: CEO compensation, relative wealth concerns, employee wages, inequality aversion, pay inequality
JEL Classification: D63, G02, G34, J31
Suggested Citation: Suggested Citation