Do Managers Manipulate Employee Labor Costs to Meet Firm- and Executive-Level Targets?
Fair and equitable employee compensation within firms has received considerable attention by regulators, the media, and academic researchers. For example, many prominent CEOs have made explicit commitments to compensate employees fairly (Business Roundtable, 2019). The objective of this study is to provide evidence on this ongoing controversy by investigating whether managers manipulate non-executive labor costs to meet performance benchmarks. First, I predict and find that managers manipulate labor costs to meet analysts' earnings forecasts. Having established that managers manipulate labor costs to meet firm-level performance benchmarks, I next explore the extent to which managers manipulate non-executive employee labor costs to meet executive-level bonus targets. I find no consistent evidence that managers manipulate labor costs to meet or exceed their individual bonus targets. Collectively, this evidence indicates that managers are more focused on meeting firm-level benchmarks rather than individual level targets, suggesting that managers are, on average, not as self-serving as they are sometimes portrayed.