DP4425 Executive Compensation and Competition in the Banking and Financial Sectors

Author(s): Vicente Cuñat, Maria Guadalupe
Publication Date: June 2004
Keyword(s): executive compensation, performance related pay, product market competition
JEL(s): J31, L10
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4425

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.