Leverage and employee compensation – the perspective of human capital

Abstract

Purpose The purpose of this paper is to empirically test the predictions in Titman (1984) and Berk et al. (2010) which indicate that firms with higher leverage will pay chief executive officer (CEO) and employee more. In addition, this paper examines whether financial distressed firms utilize leverage as a bargaining tool to reduce labor costs. Design/methodology/approach This paper conducts ordinary least squares regression analysis to investigate: CEO compensation which represents critical employees and lower-level employee compensation which represents less critical employees. Empirical data consist of US publicly held companies during the period between 2006 and 2013. Findings This paper finds that firms with higher levels of leverage tend to compensate employees for their human capital risk and that financially distressed firms consider leverage a bargaining tool by which to depress labor costs, which leads to lower employee compensation as compared to that of financially healthy firms. Research limitations/implications This paper highlights the importance of keeping balance between human capital and labor costs. In the case that human capital risk might not be fully compensated by firms facing financial distress, vicious cycle could occur because a failure of considering human capital might invite unrecoverable consequence. This could be done in future research. Originality/value This paper has three contributions. First, this paper supports the Titman (1984) and Berk et al. (2010) by empirically documenting that high-leveraged firms compensate their employees for potential human capital risk. Second, this paper adds to the literature by empirically providing that human capital risk might not be fully compensated if the firms are facing financial distress. Finally, this paper contributes to the authorities by showing that employees’ interests may be sacrificed if the firm is under financial distress.

Determinants of Executive Compensation

“…In the first regression, profitability without control variable has negative significant relationship, and consistent with first regression, in the second regression also shows profitability with control variable has a negative significant impact on executive compensation. The findings confirm the previous research on the relationship profitability and executive compensation relationship (Lin et al (2018), Kazan et al (2016), Yousuf & Kaysher (2016. Then, the results dispute the positive impact of the profitability on the executive compensation.…”

“…Leverage is defined as a ratio that measures the company's ability to pay all of its obligation, both short and long term (Lin et al, 2018). We note that leverage variable negatively influences the executive compensation by DER proxies (Dahiya, 2018).…”

The Effect of Compensation, Work Environment, and Work Motivation on Employee Productivity

“…Recompense is a critical calculate and a concern for numerous organizations in keeping up and pulling in quality human assets. Stipend is all outward rewards that representatives get within the shape of compensation, motivations, and a few benefits (Lin, Liang, Chiu, & Chen, 2019).…”

Military veterans on the board and executive compensation

“…Following prior literature, our vector of control variables (italicXi,t-1) includes determinants of CEO compensation as well as board and ownership structure variables (e.g. Core et al , 1999; Hsieh et al , 2019; Hwang and Kim, 2009; Lin et al , 2019). These control variables include Military CEO, E-index, CEO Tenure, CEO Ownership, CEO=Chairman, Outside Director Ownership, Board Size, and Female Director, Independent director%, Firm Size, Stock Return and ROA.…”