Should employers pay their employees better? An asset pricing approach

TL;DR

This paper identifies a new asset pricing anomaly where higher employee remuneration correlates with better stock performance, and introduces a novel methodology to analyze firm-specific factors and their associated risks.

Contribution

It presents an original approach using firm financial characteristics to construct less correlated factors and explains the remuneration anomaly through positive pay-performance correlation.

Findings

Higher salary expenditure correlates with superior stock returns.

Remuneration policies share common risk similar to the value premium.

Introduces a new methodology for factor construction and analysis.

Abstract

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.