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Variable Pay and Risk Sharing Between Firms and Workers

Author

Listed:
  • Sockin, Jason

    (Cornell University)

  • Sockin, Michael

    (University of Texas at Austin)

Abstract

Firms differ in the extent to which they use variable pay. Using U.S. employeeemployer matched data on variable pay from Glassdoor, we document such dispersion and find workers are exposed to firm-level shocks through variable pay. Credit rating downgrades from investment to speculative grade, negative shocks to financial or operational performance, and greater exposure to a financial crisis, as proxied for by the collapse of Lehman Brothers, induce firms to shift compensation toward base pay. Increased use of variable pay is associated with greater earnings variance for workers but less volatile growth for firms. We rationalize these findings in a model of risk sharing between a risk-averse firm and workers with limited commitment.

Suggested Citation

  • Sockin, Jason & Sockin, Michael, 2025. "Variable Pay and Risk Sharing Between Firms and Workers," IZA Discussion Papers 17644, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17644
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    More about this item

    Keywords

    risk sharing; bonuses; firm-specific shocks; employment volatility; layoffs;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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