Worker Runs

Abstract

The voluntary departure of hard-to-replace skilled workers worsens firm prospects, which can lead to additional departures. We develop a model in which firms design compensation to limit the risk of such “worker runs.” To achieve cost-efficient retention, firms combine fixed wages with dilutable compensation—such as vesting equity or bonus pools—which pays remaining workers more when others leave but gets diluted otherwise. Compensating (identical) workers with differently structured compensation, that is, with a different mix of output-dependent and output-independent pay, can further mitigate the risk of worker runs by ensuring a critical retention level in a cost-efficient way.