We develop a model to analyze the link between financial leverage, worker pay structure and the risk of job termination. Contrary to the conventional view, we show that even in the absence of any agency problem among workers, variable pay can be optimal despite workers being risk averse and...

We develop a model of variable pay driven by the capital structure problem of the firm, as opposed to a problem related to the worker, on which the prior literature has focused. If workers face low unemployment risk, firms use more variable pay, and more leverage. With an agency problem embedded...