Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry
Paul L. Joskow
Alfred P. Sloan Foundation; Massachusetts Institute of Technology (MIT) - Department of Economics
Nancy L. Rose
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)
Catherine D. Wolfram
University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)
NBER Working Paper No. w4980
This study explores the effect of regulatory and political constraints on the level of CEO compensation for 87 state-regulated electric utilities during 1978-1990. The results suggest that political pressures may constrain top executive pay levels in this industry. First, CEOs of firms operating in regulatory environments characterized by investment banks as relatively `pro-consumer' receive lower compensation than do CEOs of firms in environments ranked as more friendly to investors. Second, CEO pay is lower for utilities with relatively high or rising rates, or a higher proportion of industrial sales, consistent with earlier research that describes political pressures on electricity rates. Finally, attributes of the commission appointment and tenure rules affect CEO compensation in ways consistent with the political constraint hypothesis: for example, pay is lower in states with elected commissioners than in states where commissioners are appointed by the governor, all else equal. Despite apparently effective pressure to constrain pay levels in this sector, however, we find no evidence of related intra-industry variation in the sensitivity of pay to firm financial performance.
Number of Pages in PDF File: 33working papers series
Date posted: July 19, 2000
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