Working Paper: CEPR ID: DP4425
Authors: Vicente Cuat; Maria Guadalupe
Abstract: This Paper studies the effect of product market competition on the compensation packages that firms offer to their executives and in particular its impact on the sensitivity of pay to performance. To measure the effect of competition we use two different identification strategies on a panel of US executives. We exploit two deregulation episodes in the banking and financial sectors as quasi-natural experiments. We provide difference in differences estimates of the effect of competition on estimated performance-pay sensitivities and on the sensitivity of stock option grants. Our results indicate that a higher level of product market competition increases the performance pay sensitivity of executive compensation schemes.
Keywords: Executive compensation; Performance related pay; Product market competition
JEL Codes: J31; L10; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deregulation episodes (L51) | Higher level of product market competition (L19) |
| Deregulation episodes (L51) | Sensitivity of executive pay to performance measures (M52) |
| Deregulation episodes (L51) | Fixed component of pay (J33) |
| Fixed component of pay (J33) | Performance-based compensation structures (J33) |
| Higher level of product market competition (L19) | Performance pay sensitivity of executive compensation schemes (J33) |
| Higher level of product market competition (L19) | Sensitivity of executive pay to performance measures (M52) |