Unraveling the knot: Organized labor and the complexity of CEO compensation

Abstract This study examines how labor unions influence the complexity of CEO compensation contracts. We find unionization rates positively correlate with complexity, especially in the performance‐based components. This relationship reflects firms balancing the need to recruit talented CEOs with higher contingent pay against union preferences for less discretionary salary. We discover, however, that greater complexity results in higher future CEO incentive compensation, thus widening the gap between CEO and employee pay. Further, elevated complexity increases the likelihood of a work stoppage. Our results emphasize the challenges of introducing complexity into executive compensation design in unionized environments.