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Are CEOs the Only Residual Claimants? Estimation of the Performance Elasticity of Per-Employee Compensation

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  • Bruce A. Rayton

    (Washington University-St. Louis, MO)

Abstract

This paper evaluates the intensity of the value-maximization incentives for average employees generated through wage, salary, and bonus mechanisms. This is accomplished through estimation of the elasticity of average employee hourly compensation with respect to changes in firm performance. This performance elasticity indicates the degree of alignment between employee and shareholder objectives, and it can also be interpreted as a residual income claim for employees. The estimated performance elasticity for the full sample of firms is indistinguishable from a CEO performance elasticity of 0.1 published in Coughlan and Schmidt (1985). The estimated performance elasticity is 0.152 in small firms and indistinguishable from zero in large firms. While CEO rewards are larger than the rewards of average employees in absolute terms, these rewards represent comparable fractions of income for both the CEO and the average employee. Firms use wage, salary and bonus adjustments to direct approximately 4.1 percent of firm value increases to employees. These results indicate that average employees hold a significant stake in firm performance.

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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9412001.

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Date of creation: 16 Dec 1994
Date of revision: 16 Jun 1995
Handle: RePEc:wpa:wuwpio:9412001

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Related research

Keywords: incentives; agency costs; pay-performance sensitivities; profit-sharing;

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Cited by:
  1. Harvey S. James Jr., 1997. "A Legal Basis for Workers as Agents: Employment Contracts, Common Law, and the Theory of the Firm," Law and Economics 9705001, EconWPA, revised 04 Feb 2002.
  2. Bruce Rayton, 1997. "Rent-sharing or incentives? Estimating the residual claim of average employees," Applied Economics Letters, Taylor & Francis Journals, vol. 4(12), pages 725-728.
  3. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Really Paid Like Bureaucrats?," NBER Working Papers 6213, National Bureau of Economic Research, Inc.

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