How do labor representatives affect incentive orientation of executive compensation?

Abstract

Contrary to previous literature we hypothesize that labor's interest may well-like that of shareholders-aim at securing the long-run survival of the firm. Consequently, employee representatives on the supervisory board could well have an interest in increasing incentive-based compensation to avoid management's excessive risk taking and short-run oriented decisions. We compile unique panel data on executive compensation over the periods 2006-2011 for 405 listed companies and use a Hausman-Taylor approach to estimate the effect of codetermination on the compensation design. Finally, codetermination has a significantly positive effect on performance-based components of compensation, which supports our hypothesis.