Are CEOS the Only Residual Claimants? Estimation of the Performance Elasticity of Per-Employee Compensation

The executive compensation literature's focus on CEO incentives precludes analysis of the broader implications of incentive alignment in firms. The CEO is only one employee, and firms should shape the incentives of other employees insofar as these employees can influence firm performance. This paper borrows tools from the executive compensation literature, and it examines the incentives generated by the compensation of average employees. The estimated performance elasticity of average employee hourly compensation for the full sample of firms is indistinguishable from a CEO performance elasticity of approximately 0.1 published in Coughlan and Schmidt (1985). The average firm directs approximately 4.1 percent of firm value changes to employees. The estimated elasticity is 0.152 in small firms and indistinguishable from zero in large firms. It seems clear that firms use wage, salary and bonus mechanisms to align the incentives of average employees, and not simply the incentives of CEOs