DP17419 Worker Runs
The voluntary departure of hard-to-replace skilled workers worsens firm prospects, thus, increasing remaining workers' incentives to leave. We develop a model of collective turnover in which firms design compensation to limit the risk of such "worker runs." To achieve cost-efficient retention, firms may use fixed or dilutable variable pay -- such as stock option/bonus pools -- that promises remaining workers more when others leave but gets diluted otherwise. The optimal mix of fixed and dilutable pay depends on firms' relative risk exposure and their financial constraints. Compensating (identical) workers differently and financing investments with debt can improve collective retention.