Discussion paper
DP17419 Worker Runs
The voluntary departure of hard-to-replace skilled workers worsens firm prospects, which can prompt additional departures. We develop a model in which firms design compensation to limit the risk of such "worker runs." To achieve cost-efficient retention, firms combine fixed wages with dilutable compensation --- such as vesting equity or bonus pools --- that pays remaining workers more when others leave but gets diluted otherwise. Compensating (identical) workers with differently-structured compensation --- that is, with a different mix of output-dependent and -independent pay --- can further help mitigate the worker run problem by ensuring a critical retention level in a cost-efficient way.
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