Working Paper: CEPR ID: DP10054
Authors: Ana Fernandes; Priscila Ferreira; L. Alan Winters
Abstract: This paper studies the effect of competition on executive compensation. We estimate the effect of increased product market competition on the performance-pay sensitivity of CEOs, and contrast it with the effect for department managers and other workers in the corporation. We use a recent reform that simplified firm entry regulation in Portugal as a quasi-natural experiment. The empirical strategy exploits the staggered implementation of the reform across municipalities. Using linked employer-employee data for the universe of workers and firms, we show that increased product market competition, following the reform, decreased the sensitivity of pay to performance of CEOs, with no significant effects found for other managers or workers. These findings are consistent with existing theoretical results in a principal-agent framework that a fall in entry costs leads to weaker managerial incentives.
Keywords: Entry; Deregulation; Executive Compensation; Performance-Related Pay; Product Market Competition
JEL Codes: J31; J33; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower entry costs (D49) | Weaker managerial incentives (D22) |
| Increased competition (L13) | Decrease in performance-pay sensitivity for CEOs (M12) |
| On the spot firm program implementation (M53) | Increased competition (L13) |
| Increased competition (L13) | Increase in fixed component of compensation for CEOs (M12) |
| Increased competition (L13) | Increase in fixed component of compensation for department managers (M52) |
| Increased competition (L13) | No significant change in compensation for other workers (J39) |
| On the spot firm program implementation (M53) | Flatter performance-pay relationship for CEOs (M12) |
| Increased competition (L13) | Weaker managerial incentives (D22) |