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Rent-Sharing or Incentives? Estimating the Residual Claim of Average Employees

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  • Bruce A. Rayton

    (University of Bath School of Management)

Abstract

The rent-sharing literature and the agency literature both predict a link between pay and performance. The rent-sharing literature relies on short-term market power to explain this link, and the agency literature bases its prediction on the importance of incentives in principal-agent relationships. Annual data from an unbalanced panel of U.S. manufacturing firms indicate that the performance-elasticity of average employee pay is approximately 0.127271 in small firms while it not significantly different from zero in large firms. The relative lack of incentive pay in the group of large firms demonstrates that the link between pay and performance evident in U.S. manufacturing firms is inconsistent with the exclusive truth of the rent-sharing hypothesis.

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Bibliographic Info

Paper provided by EconWPA in its series Labor and Demography with number 9603002.

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Date of creation: 25 Mar 1996
Date of revision: 09 Sep 1996
Handle: RePEc:wpa:wuwpla:9603002

Note: This paper was published in Applied Economics Letters, 1997, 4, 725-728. (December)
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References

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  1. Hildreth, Andrew K G & Oswald, Andrew J, 1997. "Rent-Sharing and Wages: Evidence from Company and Establishment Panels," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 318-37, April.
  2. Stephen Nickell & Daphne Nicolitsas, 1995. "How does financial pressure affect firms?," LSE Research Online Documents on Economics 20698, London School of Economics and Political Science, LSE Library.
  3. Abowd, John M, 1989. "The Effect of Wage Bargains on the Stock Market Value of the Firm," American Economic Review, American Economic Association, vol. 79(4), pages 774-800, September.
  4. Bronars, Stephen G & Deere, Donald R, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 231-54, February.
  5. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  6. Cable, John & Wilson, Nicholas, 1989. "Profit-Sharing and Productivity: An Analysis of UK Engineering Firms," Economic Journal, Royal Economic Society, vol. 99(396), pages 366-75, June.
  7. L Christofides & A Oswald, 1991. "Real Wage Determination and Rent-Sharing in Collective Bargaining Agreements," CEP Discussion Papers dp0042, Centre for Economic Performance, LSE.
  8. Douglas L. Kruse, 1993. "Profit Sharing: Does It Make a Difference?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ps.
  9. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  10. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  11. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December.
  12. Oi, Walter Y, 1990. "Employment Relations in Dual Labor Markets (" It's Nice Work If You Can Get It")," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages S124-49, January.
  13. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
  14. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Joskow, Paul L. & Rose, Nancy L. & Shepard, Andrea., 1993. "Regulatory constraints on executive compensation," Working papers 3550-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  16. Bruce A. Rayton, 1994. "Are CEOs the Only Residual Claimants? Estimation of the Performance Elasticity of Per-Employee Compensation," Industrial Organization 9412001, EconWPA, revised 16 Jun 1995.
  17. Bhargava, Sandeep, 1994. "Profit-Sharing and the Financial Performance of Companies: Evidence from U.K. Panel Data," Economic Journal, Royal Economic Society, vol. 104(426), pages 1044-56, September.
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Citations

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Cited by:
  1. Rayton, Bruce A., 2003. "The residual claim of rank and file employees," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 129-148, January.
  2. Bruce A. Rayton & Jonathan S. Seaton, 1999. "The size of employee stakeholding in large UK corporations," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(5), pages 259-266.
  3. Rayton, Bruce A., 2003. "Firm performance and compensation structure: performance elasticities of average employee compensation," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 333-352, June.

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