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Employee bargaining power, inter-firm competition, and equity-based compensation

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  • Bova, Francesco
  • Yang, Liyan

Abstract

We develop a model to illustrate that equity-based compensation for non-executive employees and product market decisions are related. When the product market is competitive and employees have low bargaining power, the unique equilibrium is for each firm’s owners to offer equity-based compensation to their employees. In this setting, equity-based compensation leads to a lower wage rate, which makes each firm more competitive with its rival. However, this unique equilibrium is a Prisoner’s Dilemma for the firms’ original owners. Our results are consistent with several empirical regularities and provide predictions on when firms will offer equity-based compensation to their employees.

Suggested Citation

  • Bova, Francesco & Yang, Liyan, 2017. "Employee bargaining power, inter-firm competition, and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 126(2), pages 342-363.
    • Handle: RePEc:eee:jfinec:v:126:y:2017:i:2:p:342-363
    DOI: 10.1016/j.jfineco.2017.07.006
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    Cited by:

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    3. Vladimirov, Vladimir, 2021. "Financing Skilled Labor," CEPR Discussion Papers 15751, C.E.P.R. Discussion Papers.
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    6. Barnes, Spencer & Cheng, Yingmei, 2023. "Employee approval of CEOs and firm value: Evidence from Employees' choice awards," Journal of Corporate Finance, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Employee bargaining power; Market competition; Equity compensation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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