Skilled Labor Risk and Compensation Policies

We measure U.S. publicly traded companies’ exposures to skilled labor risk, i.e., the potential failure in attracting and retaining skilled labor, by the intensity of their discussions on this issue in their 10-K filings. We show that this measure effectively captures firm risk due to the mobility of skilled labor. We find that skilled labor’s outside options are industry-specific and local. Also, skilled labor risk is an important determinant of compensation policy for skilled labor. A one-standard-deviation increase in skilled labor risk would increase the skilled labor wage by 15% relative to the sample mean or a premium of $13,578, and the premium increases with the level of labor skill. Skilled labor’s compensation is also structured substantially more towards equity-based incentive pay, consistent with the theoretical predictions.