Do Entrenched Managers Pay Their Workers More?

Analyzing a large panel that matches public firms with worker-level data, we find that managerial entrenchment affects workers’ pay. CEOs with more control pay their workers more, but financial incentives through ownership of more cash flow rights mitigate such behavior. These findings do not seem to be driven by productivity differences, and are unaffected by a series of robustness tests. Further evidence suggests that higher pay comes with non-pecuniary private benefits for a CEO, such as lower-effort wage bargaining with aggressive workers and their unions. Moreover, we find that entrenched CEOs pay more to employees who are closer to them in the firm’s hierarchy, such as CFOs, vice-presidents and other executives, and white-collar workers who work at or geographically close to the corporate headquarters. The evidence is consistent with an agency model in which managers have a taste for both profits and highly paid employees, and implies that corporate governance can be of importance for labor market outcomes such as workers’ pay.