DP15751 Financing Skilled Labor

Author(s): Vladimir Vladimirov
Publication Date: February 2021
Keyword(s): compensation structure of non-executive employees, contagious turnover, Financing wages, high-skilled employees, worker bargaining power, worker runs
JEL(s): G32, J33, J54, M52
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15751

How does competition for high-skilled workers affect the design and financing of compensation? The paper shows that competition affects compensation structure by leading to more equity-based pay. Such compensation attracts workers by helping them extract higher expected pay when uncertain about firm value. Equity-based compensation reduces firms' need for external financing, but it increases retention risk. Specifically, by making workers dependent on the retention of other workers, equity-based compensation increases the risk that worker turnover becomes contagious. To lower their compensation costs and improve retention, firms with stronger bargaining power favor deferred fixed compensation backed by credit lines.