Rent-sharing or incentives? Estimating the residual claim of average employees

Abstract

The rent-sharing literature and the agency literature both predict a link between pay and performance. The rent-sharing literature relies on short-term market power to explain this link, while the agency literature bases its prediction on the importance of incentives in principal-agent relationships. Annual data from an unbalanced panel of US manufacturing firms indicate that the performance-elasticity of average employee pay is approximately 0.127271 in small firms while it not significantly different from zero in large firms. The relative lack of incentive pay in the group of large firms demonstrates that the pay-performance link evident in US manufacturing firms is inconsistent with the exclusive truth of the rent-sharing hypothesis.