Hard Debt, Soft CEOs, and Union Rents

Bond covenants may constrain managers from acquiescing to union wage demands. Yet, because high wages and high levels of worker discipline are substitutes, unions can win higher wages by raising the cost of detecting slack workers. In this case, shareholders may be better off delegating to a CEO with different objectives than their own. A top manager motivated to share surpluses with workers - a quot;softquot; CEO - can encourage union members to adopt efficient production methods. In this context, shareholder value may be maximized by CEO incentive contracts with limited upsides, lower levels of pay, and some entrenchment protections