The Additional Costs of CEO Compensation: The Effect of Relative Wealth Concerns of Employees

We hypothesize that employees have relative wealth concerns and compare their wages to the CEO’s pay. Using German establishment-level wage data, we show that employee wages increase with CEO compensation – in levels and in differences. We use a regulatory change that required individual executive compensation disclosure as an exogenous shock and find the same result. We find that envious behavior is geared toward CEOs rather than toward the management team. Employee wage increases are particularly strong when press articles are critical about executive compensation. Our findings suggest that employees’ envious behavior drives wages and significantly increases the costs of executive compensation.