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Variable pay: Is it for the worker or the firm?

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  • Allen, Jason
  • Thompson, James R.

Abstract

Why do firms pay their workers with variable pay? The standard explanation appeals to a problem that the worker faces, e.g., agency. We develop a model of variable pay endogenously driven by the capital structure problem of the firm, and not a worker related problem. If workers face a low probability of job termination, firms use more variable pay, and more leverage. This can have important implications for understanding compensation practices in organizations. We provide empirical evidence consistent with firms using variable pay to increase leverage.

Suggested Citation

  • Allen, Jason & Thompson, James R., 2019. "Variable pay: Is it for the worker or the firm?," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 551-566.
  • Handle: RePEc:eee:corfin:v:58:y:2019:i:c:p:551-566
    DOI: 10.1016/j.jcorpfin.2019.07.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Worker compensation; Leverage;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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