Equity Pay Beyond the C-Suite

"Human Capitalists" with Antonio Falato and Mindy Xiaolan (2022 NBER Macro Annual, Chapter 1) (Lead article)

The widespread and growing use of equity-based compensation has transformed high-skilled labor from a pure labor input to a class of "human capitalists." High-skilled labor earns substantial income in the form of equity claims to firms' future dividends and capital gains. Equity-based compensation has increased substantially since the 1980s, representing 36 percent of total compensation to high-skilled labor in US manufacturing in recent years. Ignoring equity income causes incorrect measurement of the returns to high-skilled labor, with substantial effects on macroeconomic trends. In manufacturing, the inclusion of equity-based compensation almost eliminates the decline in the high-skilled labor share, and reduces the total decline in the labor share by about one-third. Only by including equity pay does our structural estimation support complementarity between high-skilled labor and physical capital greater than that of Cobb and Douglas (1928). We also provide additional regression evidence of such complementarity.

Equity Pay Beyond the C-Suite with Antonio Falato, Dongryeol Lee, and Mindy Zhang.

Equity pay has become increasingly common over the last several decades but the differences in the level of equity pay across firms are very large. This study documents the inequality in equity pay across firms and describes the drivers of firm-level differences in equity pay policies. We show that firm-level equity pay is very persistent, and a large fraction of the differences across firms in equity pay comes from differences in initial values. Some of the differences in initial values can be attributed to differences across firms' financial constraints and to substantial peer effects. We show that high equity pay firms manage equity pay most actively, in particular counteracting the effects of stock price gains and losses. High-equity pay firms tend to be younger, and to experience subsequently higher employment growth. We also compare equity pay beyond the C-Suite to CEO equity pay and show that CEOs' equity pay is much less persistent, and is actually lower at younger firms and firms that experience higher employment growth. We argue that equity pay is both a compensation and a capital structure decision, and draw out these parallels.

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