Impacts of Top Five Executives’ Compensation on Employee Wages

Abstract

This paper studies the impacts of incentive compensation to the top five executives on employee wages. We employ pay-performance sensitivity (PPS) to measure executive incentive compensation. Using data for firms from Wharton Research Data Services over 1992 to 2017 period, we find that there exists a negative relation between executive incentive compensation and employee wages. In addition, we examine the impacts of executive incentive compensation on employee wages in different industries and find that the impacts are more severe in non-technology firms than in technology firms. Finally, we show that the executives with higher incentive compensation are more likely to suppress employee wages in financially distressed firms. Since the impacts of incentive compensation to top five executives on employee wages are similar to those to CEO, top executives appear to work together as a team, which supports executive compensation as team perspective. Furthermore, firm performance may not be promoted by granting high incentive compensation to executives.