Compensation in High Finance: A Theory of Periodic Labor Markets and Guaranteed Bonuses

Edward Van Wesep Brian Waters - Dec 17, 2018

Working Paper No.  00048-00

We present a general equilibrium model of labor market ows that features a periodic equilibrium in which turnover is high in some periods and low in others. If a firm fi nds itself in a periodic equilibrium, it is optimal to time compensation in the form of low wages and a large bonus delivered just prior to periods with deep labor markets. This ensures that employees depart when replacements are available. The theory generates large, coordinated bonuses, high overall pay, and seasonal turnover, each of which is consistent with evidence from the labor market in high finance.

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