Managerial compensation in a two-level gift-exchange experiment

Managerial compensation in a two-level gift-exchange experiment

Fernanda RivasUniversitat Autònoma de Barcelona

Nils HesseAlbert-Ludwigs Universität Freiburg

Managerial compensation in a two-level gift-exchange

experiment

Motivation

In times of increasing international competition, firms demand employees to make concessions to carry out necessary restructuring measures, that can partly be resisted by the workers, whose behavior at work can not be fully contracted upon

Excessive management compensations contradict justice preference of a majority, in particular in times of downsizing


experiment

Research questions

1. Is workers’ effort influenced by the perception of managerial compensation?

2. Is high executive pay particularly salient during downsizing?

3. Do workers still exert their effort in response to wage offers if the wage-setter gets only a small part of the benefits generated by the workers?


experiment

Experiment Subjects divided into three groups: Firm’s owners, Managers,

Workers

4 groups of 5 subjects per session: 1 Firm, 1 Manager, 3 Workers

30 rounds per session. Stranger matching

TREATMENTS: 4 treatments determined by: Salary of the Manager: Public / Private information Decides the Workers’ wage: Firm / Manager

Endowment of the Firm: 15 LE in the first 15 periods, 10 LE after period 15Sessions Workers' wage set by Managers' wage Endowment

1-2 PuW/MD Manager Public 15 LE / 10 LE3-4 PrW/MD Manager Private 15 LE / 10 LE5-6 PuW/FD Firm’s Owner Public 15 LE / 10 LE7-8 PrW/FD Firm’s Owner Private 15 LE / 10 LE


experiment

Experiment : stages in each period

IN MD SESSIONS

Firm decides Manager’s wage Manager decides Workers’ wage (the 3 workers receive the

same wage) Manager and workers choose a level of effort Manager and Firm are informed about the decision of Workers,

Workers are informed about the total revenue

IN FD SESSIONS

• Firm decides Manager’s and Workers’ wage (the 3 workers: same wage)

• Manager and workers choose a level of effort• Manager and Firm are informed about the decision of Workers,

Workers are informed about the total revenue


experiment

Experiment

Payoffs

Firm's payoff = Initial Endowment + Total Revenue - Total Salaries

Manager's payoff = Manager's Wage + Bonus - Cost of Effort Worker's payoff = Worker's Wage - Cost of Effort

Total salaries = fixed salaries workers and managers + Bonus manager Bonus = 20% of Profit provided by Workers = Revenue provided by the workers –

Salaries paid to the workers The Bonus is paid if Revenue > Salaries

Revenues and costs of effort Effort level Costs of the effort

Revenue provided by the worker

Revenue provided by the manager

0 0 0 01 0.1 2 62 0.3 3.3 103 0.6 4 12


experiment

Results

Does the perception of the managerial compensation have an impact on the workers' effort choices ?

Independent variable: the workers' effort choice Panel data model (also clustering) We report the coefficient of the variable Manager's wage of the

estimations We control for: each worker's wage, period, sex, age, field of study,

person choosing the workers' wages (firm or manager)

• We have: period, age and gender effect• Result 2: Workers' effort decisions are negatively correlated with

the manager's wage, especially after the wage cut

Total Part I Part IIWorker's wage = 0 0.0008 -0.0064 -0.0041 Worker's wage = 1 -0.0146 -0.0083 -0.0478** Worker's wage = 2 -0.0703*** -0.0783*** -0.1025** Worker's wage = 3 -0.1111*** -0.1131*** -0.7094***Worker's wage = 4 -0.0996 -0.0996 Worker's wage = 5*** signif 1% level **signif 5% level *signif 10% level


experiment

Results : wage and effort

Result 5: There exists a strong positive relation between own wage and effort levels for workers the higher the own wage the more effort

while the managers' effort reaches a maximum for middle wages and then decreases for very high wages

0.0

0.5

1.0

1.5

2.0

2.5

1 2 3 4 5 6

Workers' wage

Ave

rag

e w

ork

ers'

eff

ort

0.0

0.5

1.0

1.5

2.0

2.5

1 2 3 4 5 6 7 8 9 10 11

Managers' wage

Ave

rag

e m

anag

ers'

eff

ort


experiment


0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 1 2 3 4 5

Workers' wage

Ave

rag

e w

ork

ers'

eff

ort

MD Public

FD Public

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 1 2 3 4 5

Workers' wage

Ave

rag

e w

ork

ers'

eff

ort

MD Private

FD Private

MD and FD: very similar, especially with public information


experiment


0.0

0.1

0.2

0.3

0.4

0.5

0.6

WorkersPrivate

WorkersPublic

ManagersPrivate

ManagersPublic

Ra

tio

eff

ort

/wa

ge

Part I

Part II

Result 6: The ratio effort/wage for the workers decreases from part I to part II with private information, but increases with public information


experiment


The ratio for workers is higher in PuW than in PrW in the MD-sessions, and the opposite is observed in FD-sessions when the manager decides workers' wage it has a positive effect to disclose the managerial compensation

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

FD MD

Ra

tio

eff

ort

/wa

ge

Private

Public


experiment

Conclusions Workers' effort decisions are negatively correlated with the

manager's wage, especially after wage cuts

MD and FD: very similar, especially with public information

Negative effect of manager’s wage wage compression is in fact a good strategy

Regardless of the negative effects of high managerial wages, the opportunity to observe the managerial compensation had a positive impact on workers' effort choices, when the managers set the workers' wages. Under these realistic circumstances, it seems that to disclose managerial wages is a good strategy in terms of workers’ effort

Managerial compensation in a two-level gift-exchange experiment

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