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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
Managerial compensation in a two-level gift-exchange
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?
Managerial compensation in a two-level gift-exchange
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
Managerial compensation in a two-level gift-exchange
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
Managerial compensation in a two-level gift-exchange
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
Managerial compensation in a two-level gift-exchange
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
Managerial compensation in a two-level gift-exchange
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
Managerial compensation in a two-level gift-exchange
experiment
Results : wage and effort
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
Managerial compensation in a two-level gift-exchange
experiment
Results : wage and effort
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
Managerial compensation in a two-level gift-exchange
experiment
Results : wage and effort
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
Managerial compensation in a two-level gift-exchange
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