Premium
S hareholder A ctivism , “V oluntary ” R estructuring, and I nternal L abor M arkets
Author(s) -
Garvey Gerald T.,
Swan Peter L.
Publication year - 1995
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1995.00591.x
Subject(s) - shareholder , restructuring , business , position (finance) , compensation (psychology) , promotion (chess) , labour economics , turnover , face (sociological concept) , market economy , finance , economics , corporate governance , psychology , social science , management , sociology , politics , political science , psychoanalysis , law
We model an internal labor market in which employee behavior and compensation are affected by the firm's financial position and the threat of hostile takeover or other exercise of shareholder “voice.” We show how good past performance can result in excessively generous promotion and pay decisions. While the threat of shareholder activism will remove this “slack,” activists optimally face a positive cost barrier, which in turn varies across firms. The cost barrier is higher when cooperation or “helping” between employees is more important, and is lower when employees receive efficiency wages due to an inability to “pay” for their jobs. Since the importance of helping is associated with pay compression and “flat” pay ladders, such firms should also exhibit a greater degree of management entrenchment.