Hard debt, soft CEOs, and union rents

Purpose – This paper aims to derive insights about optimal managerial compensation and firm capital structure in unionized firms. Design/methodology/approach – This paper uses applied game theory to address problems of CEO motivation in companies with unionized workforces. Findings – Managers can use high levels of debt and costly bankruptcy to win wage concessions from workers. Alternatively, workers can obstruct management in the detection of poor work. CEO compensation that encourages rent sharing may reduce union hostility and associated deadweight losses. Shareholder value may be maximized by CEO incentive contracts with limited upsides, lower levels of pay, and some entrenchment protections. Originality/value – This is the only study to use applied game theory to look at how CEO pay and capital structure affects the productivity of a unionized workforce.