More entrenchment = more employee pay

Start off with the assumption that holding employee pay down is hard work (if nothing else, you are frequently criticized). This simple assumption leads to the conclusion that ceteris paribus (holding other things constant), managers would prefer to not have to do this and would pay their employees more than is optimal.

However, as residual claimants, shareholders disagree. They do not want to see their employees overpaid as this is money out of shareholder pockets. Further, if managers persist in overpaying employees, then shareholders will replace management.

So far so good?

Now enter Cronqvist, Heyman, Nilson, Svaleryd, and Vlachos who investigate whether entrenched managers pay their employees more since the threat of firing is reduced.

Their findings fit the theory to a T! Pay is higher where there are entrenched managers!

From their abstract:

"...our estimates show that CEOs with more control rights (votes) than all other large shareholders combined pay their workers about 6%, or $2,200, higher wages per year, all else equal....we interpret the higher pay as evidence of agency problems between shareholders and managers affecting workers' pay. The findings do not appear to be driven by endogeneity of managerial ownership and are robust to a series of robustness checks.

These results are consistent with an agency model in which entrenched managers pay high wages because they come with private benefits, such as lower-effort wage bargaining and better CEO-employee relations, and suggest more broadly an important link between the corporate governance of large public firms and labor market outcomes."

Which deserves a WOW!

Cite: Cronqvist, Henrik, Heyman, Fredrik, Nilsson, Mattias, Svaleryd, Helena and Vlachos, Jonas, "Do Entrenched Managers Pay Their Workers More?" (December 2, 2005). EFA 2006 Zurich Meetings Paper Available at SSRN: http://ssrn.com/abstract=845844