The impact of unions on compensation consultants and CEO pay

Abstract

Research on executive compensation finds unions to be associated with lower executive compensation, particularly incentive pay, while other work documents the role of compensation consultants in facilitating stronger CEO incentives and pay. We propose and test the implications of a simple theoretical framework that integrates these empirical findings. We find empirical support for our model's prediction that in environments less favorable to union organization (e.g., right-to-work states), firms with higher unionization rates strategically engage consultants to counter union influence, place greater value on their advice as gauged by consultant fees, and offer managers greater equity incentives opposed by unions. On the other hand, in strongly prolabor environments, unions are more successful at curtailing consultant use and have greater influence on the level of pay and incentives.