Employee Compensation as a Stock Return and Asset Pricing Factor

Summary

The document describes an asset-pricing anomaly associated with employee remuneration: firms that spend more on salaries and benefits per employee are reported to have stronger average stock performance. It also proposes that firms with similar pay policies share a common source of risk, with a comparison to the value premium.

To study this relationship, the authors construct factors from firm financial characteristics using a methodology intended to reduce factor correlations relative to standard approaches. They introduce factor correlation level as an accessible proxy for eigenvalues of the factor correlation matrix. A possible explanation links higher compensation with stronger employee performance. The excerpt does not provide sample details, statistical tests, effect sizes, or evidence that the relationship persists after costs, so it does not establish a directly implementable trading strategy.

Key ideas

• Higher salary and benefit spending per employee is associated with stronger average stock performance in the reported analysis.
• Firms with similar remuneration policies may share a common risk factor.
• The proposed factor construction aims to reduce correlations among factors.
• Factor correlation level is presented as a proxy for eigenvalues of the correlation matrix.
• The authors suggest employee performance as a possible explanation, but the excerpt gives limited supporting detail.

Tags

# Should employers pay their employees better? An asset pricing approach


# Should employers pay their employees better? An asset pricing approach









We uncover a new anomaly in asset pricing that is linked to the remuneration: the more a company spends on salaries and benefits per employee, the better its stock performs, on average. Moreover, the companies adopting similar remuneration policies share a common risk, which is comparable to that of the value premium. For this purpose,we set up an original methodology that uses firm financial characteristics to build factors that are less correlated than in the standard asset pricing methodology. We quantify the importance of these factors from an asset pricing perspective by introducing the factor correlation level as a directly accessible proxy of eigenvalues of the correlation matrix. A rational explanation of the remuneration anomaly involves the positive correlation between pay and employee performance.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.