Conflict or Collusion?: How Employees in the Boardroom Affect Executive Compensation

Abstract

This paper examines how direct involvement of employees in corporate governance affects executive compensation. German law mandates that half of the supervisory board seats belong to employee representatives in firms with over 2,000 domestic employees. For identification, we exploit this discontinuity, a law change which grants employees more influence over compensation, and a combination of both. In all three settings, we find that executive compensation rises by about one-third if employee voice is strengthened. Employees are also better off, as evidenced by increased employment protection. These results support that employee control facilitates the alliance between managers and employees.