The Effect of Competition on Managers' Compensation: Evidence From a Quasi-natural Experiment

Ana Fernandes, Priscila Ferreira () and L. Winters

No 57, NIMA Working Papers from Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho

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 simplied 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 deregulation, decreased the sensitivity of pay to performance of CEOs and other managers, with no significant effects found for other 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; Product Market Competition; Executive Compensation; Performance-related Pay (search for similar items in EconPapers)
JEL-codes: J31 J33 M52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-07
New Economics Papers: this item is included in nep-bec, nep-com and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: The Effect of Competition on Managers? Compensation: Evidence From a Quasi-natural Experiment (2014)
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