Managers’ education and the choice of different variable pay schemes: Evidence from Italian firms

• We consider the role of the education of managers with respect to the adoption of variable pays.
• We examine a large sample of Italian firms using a unique and rich data set.
• We examine different types of variable pays, at the individual, team and establishment levels.
• The positive association of education with variable pays has been validated by our estimates.

In this paper, we investigate the influence of the education of managers, which we hypothesise to be a signal of quality, on the adoption of variable pay (VP) schemes by Italian firms. We estimate the extent to which differences in the diffusion of VP between Italian firms reflect differences in the quality of managers. Our estimates, which we obtained by taking both endogeneity and unobserved heterogeneity into account, validate our hypotheses regarding the direct positive association of managers’ education with the adoption of VP schemes. Furthermore, we ascertain the role of managers’ education by examining its influence on the choice between different types of VP bonuses at the individual, team, and establishment levels. Our results suggest that highly educated manages are more likely to use team and individual forms of VP schemes.