Hostname: page-component-848d4c4894-p2v8j Total loading time: 0.001 Render date: 2024-05-14T03:43:17.076Z Has data issue: false hasContentIssue false
  • English
  • Français

The Effect of Labor Unions on CEO Compensation

Published online by Cambridge University Press:  21 April 2017

Qianqian Huang ,
Feng Jiang ,
Erik Lie  and
Tingting Que
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We find evidence that labor unions affect chief executive officer (CEO) compensation. First, we find that firms with strong unions pay their CEOs less. The negative effect is robust to various tests for endogeneity, including cross-sectional variations and a regression discontinuity design. Second, we find that CEO compensation is curbed before union contract negotiations, especially when the compensation is discretionary and the unions have a strong bargaining position. Third, we report that curbing CEO compensation mitigates the chance of a labor strike, thus providing a rationale for firms to pay CEOs less when facing strong unions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 2 , April 2017 , pp. 553 - 582
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

References

Abowd, J. M.“The Effect of Wage Bargains on the Stock Market Value of the Firm.” American Economic Review, 79 (1989), 774–800.Google Scholar
Adams, J.“Inequity in Social Exchange.” In Advances in Experimental Social Psychology, Vol. 2, Berkowitz, L., ed. New York, NY: Academic Press (1965), 267–299.Google Scholar
Akerlof, G., and Yellen, J.. “The Fair Wage-Effort Hypothesis and Unemployment.” Quarterly Journal of Economics, 105 (1990), 255–283.CrossRefGoogle Scholar
Banning, K., and Chiles, T.. “Trade-Offs in the Labor Union-CEO Compensation Relationship.” Journal of Labor Research, 28 (2007), 347–357.Google Scholar
Bhagat, S., and Romano, R.. “Reforming Executive Compensation: Focusing and Committing to the Long-Term.” Yale Journal on Regulation, 26 (2009), 359–372.Google Scholar
Bova, F.“Labor Unions and Management’s Incentive to Signal a Negative Outlook.” Contemporary Accounting Research, 30 (2013), 14–41.Google Scholar
Bowen, R.; DuCharme, L.; and Shores, D.. “Shareholders’ Implicit Claims and Accounting Method Choice.” Journal of Accounting and Economics, 20 (1995), 255–295.Google Scholar
Bradley, D.; Kim, I.; and Tian, X.. “The Causal Effect of Labor Unions on Innovation.” Working Paper, Indiana University (2013).Google Scholar
Bronars, S., and Deere, D.. “The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth.” Quarterly Journal of Economics, 106 (1991), 231–254.CrossRefGoogle Scholar
Chen, J.; Kacperczyk, M.; and Ortiz-Molina, H.. “Labor Unions, Operating Flexibility, and the Cost of Equity.” Journal of Financial and Quantitative Analysis, 46 (2011), 25–58.Google Scholar
Chen, J.; Kacperczyk, M.; and Ortiz-Molina, H.. “Do Non-Financial Stakeholders Affect the Pricing of Risky Debt? Evidence from Unionized Workers.” Review of Finance, 16 (2012), 347–383.Google Scholar
Chyz, J.; Leung, W.; Li, O.; and Rui, O.. “Labor Unions and Tax Aggressiveness.” Journal of Financial Economics, 108 (2013), 675–698.Google Scholar
Coles, J.; Daniel, N.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.Google Scholar
Comprix, J., and Muller III, K.. “Pension Plan Accounting Estimates and the Freezing of Defined Benefit Pension Plans.” Journal of Accounting and Economics, 51 (2011), 115–133.CrossRefGoogle Scholar
Core, J.; Guay, W.; and Larcker, D.. “The Power of the Pen and Executive Compensation.” Journal of Financial Economics, 88 (2008), 1–25.Google Scholar
Core, J.; Holthausen, R.; and Larcker, D.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.Google Scholar
Cramton, P., and Tracy, J.. “Strikes and Holdouts in Wage Bargaining: Theory and Data.” American Economic Review, 82 (1992), 100–121.Google Scholar
Cullinan, C., and Knoblett, J.. “Unionization and Accounting Policy Choice: An Empirical Examination.” Journal of Accounting and Public Policy, 13 (1994), 49–78.CrossRefGoogle Scholar
Cuñat, V.; Gine, M.; and Guadalupe, M.. “The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value.” Journal of Finance, 67 (2012), 1943–1977.Google Scholar
Custodio, C.; Ferreira, M.; and Matos, P.. “Generalists vs. Specialists: Lifetime Work Experience and CEO Pay.” Journal of Financial Economics, 108 (2013), 471–492.Google Scholar
DeAngelo, H., and DeAngelo, L.. “Union Negotiations and Corporate Policy: A Study of Labor Concessions in the Domestic Steel Industry during the 1980s.” Journal of Financial Economics, 30 (1991), 3–43.Google Scholar
Dial, J., and Murphy, K.. “Incentives, Downsizing, and Value Creation at General Dynamics.” Journal of Financial Economics, 37 (1995), 261–314.Google Scholar
DiNardo, J. K., and Lee, D. S.. “Economic Impacts of New Unionization on Private Sector Employers: 1984–2001.” Quarterly Journal of Economics, 119 (2004), 1383–1441.Google Scholar
D’Souza, J.; Jacob, J.; and Ramesh, K.. “The Use of Accounting Flexibility to Reduce Labor Renegotiation Costs and Manage Earnings.” Journal of Accounting and Economics, 30 (2000), 187–208.Google Scholar
Eldenburg, L., and Krishnan, R.. “Public versus Private Governance: A Study of Incentives and Operational Performance.” Journal of Accounting and Economics, 35 (2003), 377–404.CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Muslu, V.. “Shareholder Activism and CEO Pay.” Review of Financial Studies, 24 (2011), 535–592.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Hanka, G.“Debt and the Terms of Employment.” Journal of Financial Economics, 48 (1998), 245–282.Google Scholar
Harford, J., and Li, K.. “Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs.” Journal of Finance, 62 (2007), 917–949.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Heron, R., and Lie, E.. “Does Backdating Explain the Stock Price Pattern around Executive Stock Option Grants?” Journal of Financial Economics, 83 (2007), 271–295.Google Scholar
Hirsch, B. T.“Firm Investment Behavior and Collective Bargaining Strategy.” Industrial Relations, 31 (1992), 95–121.Google Scholar
Jensen, M., and Murphy, K.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.Google Scholar
Joskow, P.; Rose, N.; and Wolfram, C.. “Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry.” Rand Journal of Economic, 27 (1996), 165–182.Google Scholar
Klasa, S.; Maxwell, W.; and Ortiz-Molina, H.. “The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions.” Journal of Financial Economics, 92 (2009), 421–442.Google Scholar
Lee, D., and Lemieux, T.. “Regression Discontinuity Designs in Economics.” Journal of Economic Literature, 48 (2010), 281–355.CrossRefGoogle Scholar
Lee, D., and Mas, A.. “Long-Run Impacts of Unions on Firms: New Evidence from Financial Markets, 1961–1999.” Quarterly Journal of Economics, 127 (2012), 333–378.Google Scholar
Liberty, S., and Zimmerman, J.. “Labor Union Contract Negotiations and Accounting Choices.” Accounting Review, 61 (1986), 692–712.Google Scholar
Lie, E.“On the Timing of CEO Stock Option Awards.” Management Science, 51 (2005), 802–812.Google Scholar
Martin, D. L.“The Agency Problem in a Nonproprietary Theory of Union Behavior.” In The Economics of Trade Unions: New Directions, Rosa, J.-J., ed. Boston, MA: Kluwer-Nijhoff (1984), 191–220.CrossRefGoogle Scholar
Matsa, D.“Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.” Journal of Finance, 65 (2010), 1197–1232.Google Scholar
Murphy, K. J.“Executive Compensation.” In Handbook of Labor Economics, Vol. 3, Ashenfelter, O. and Card, D., eds. Amsterdam, Netherlands: Elsevier (1999), 2485–2563.Google Scholar
Murphy, K. J.“Executive Compensation: Where We Are, and How We Got There.” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: North Holland (2012), 211–356.Google Scholar
Pfeffer, J., and Langton, N.. “The Effect of Wage Dispersion on Satisfaction, Productivity, and Working Collaboratively: Evidence from College and University Faculty.” Administrative Science Quarterly, 38 (1993), 382–407.Google Scholar
Rose, D.“Are Strikes Less Effective in Conglomerate Firms?” Industrial and Labor Relations Review, 45 (1991), 131–144.Google Scholar
Ross, A. Trade Union Wage Policy. Berkeley, CA: University of California Press (1948).Google Scholar
Ruback, R., and Zimmerman, M.. “Unionization and Profitability: Evidence from the Capital Market.” Journal of Political Economy, 92 (1984), 1134–1157.Google Scholar
Sheppard, B.; Lewicki, R.; and Minton, J.. Organizational Justice: The Search for Fairness in the Workplace. New York, NY: Lexington Books (1992).Google Scholar
Singh, P., and Agarwal, N.. “Union Presence and Executive Compensation: An Exploratory Study.” Journal of Labor Research, 23 (2002), 631–646.Google Scholar
Tracy, J. S.“An Investigation into the Determinants of U.S. Strike Activity.” American Economic Review, 76 (1986), 423–436.Google Scholar