Labor Market Immobility and Incentive Contract Design
55 Pages Posted: 30 Nov 2018 Last revised: 27 Oct 2020
Date Written: November 20, 2018
Research suggests that restricted labor mobility discourages managers from investing in human capital and reduces firm value. However, whether firms re-incentivize managers to mitigate its adverse effects remains unexplored. We find that after the adoption of the inevitable disclosure doctrine (an exogenous negative shock to managers’ mobility), firms convexify equity incentives and lengthen the exercisability of new option grants, especially for managers facing greater ex-ante mobility. Furthermore, treated firms become more likely to reprice options following bad luck. We provide causal evidence that labor mobility restrictions affect executive incentive compensation design and that firms react in an optimal contracting manner.
Keywords: Labor market mobility, Incentive compensation, Optimal contracting, Human capital investment, Trade secrets, Non-patentable innovation
JEL Classification: G30, G34, J33, M52, M54
Suggested Citation: Suggested Citation