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Incentive Compensation and Incentive Regulation: Empirical Evidence

Carlo Cambini, Sara De Masi and Laura Rondi

No 58, IEFE Working Papers from IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy

Abstract: This paper examines the relationship between CEO pay and firm performance within a sample of European publicly listed energy utilities from 2000 to 2010, focusing on the differential responses that arise from being subject to different regulatory regimes. In particular, we investigate the difference in pay-performance sensitivity across regulated and unregulated firms as well as the impact of different regulatory schemes – incentive vs. cost-based regulation - on CEO monetary incentives. Using various measures of performance, we find that European energy utilities link CEO compensation to firm performance, but CEO pay-performance is higher for unregulated companies. When we focus on the effect of alternative regulatory schemes, our results show that payperformance sensitivity is significantly higher for firms under incentive regulation than within firms under cost-based regulation. This result holds after controlling for firm - private vs. state - ownership and for varying degrees of market liberalization across countries.

Keywords: Managerial compensation; Incentive contracts; Incentive regulation; Energy utilities (search for similar items in EconPapers)
JEL-codes: G30 J33 L51 M12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cta, nep-eff, nep-ene, nep-eur, nep-hrm and nep-reg
Date: 2013
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