Do Board-Level Employee Representatives Increase Pay Equity in Firms?

Abstract

Question/Issue

This study investigates the role of board-level employee representatives (BLERs), a common corporate governance practice in Europe, in determining the pay ratio between CEOs and average employees.

Research Findings/Insights

Using 15,340 firm-year observations from 17 European countries between 2001 and 2019, we find that BLERs provide greater bargaining power to the board for dealing with CEOs and use this power to reduce the pay gap between CEOs and employees. Subsample analyses indicate that bargaining power is more apparent when BLERs are more socially connected, have longer tenure, and hold more seats on the board.

Theoretical/Academic Implications

This study supports the role of BLERs in providing workers with more bargaining power to create fairer wage distribution in firms. Furthermore, it supports the fair wage–effort theory, indicating a positive effect of lower pay ratios on firm value following the presence of BLERs.

Practitioner/Policy Implications

This study demonstrates the effects of a unique corporate governance practice, the presence of BLERs, on companies' wage distribution, with significant policy implications. In particular, the results indicate that when presented with opportunities in affecting companies decision-making BLERs provide fairer environments for the workers who they represent.