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How Do Labor Representatives Affect Incentive Orientation of Executive Compensation?

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  • Dyballa, Katharina

    (TU Dortmund)

  • Kraft, Kornelius

    (TU Dortmund)

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.

Suggested Citation

  • Dyballa, Katharina & Kraft, Kornelius, 2016. "How Do Labor Representatives Affect Incentive Orientation of Executive Compensation?," IZA Discussion Papers 10153, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp10153
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    More about this item

    Keywords

    executive compensation; board representation; principal-agent theory; corporate finance; Hausman-Taylor;
    All these keywords.

    JEL classification:

    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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