The Effect of Competition on Managers’ Compensation: Evidence from a Quasi-Natural Experiment

35 Pages Posted: 25 Sep 2014

See all articles by Priscila Ferreira

Priscila Ferreira

University of Essex

L. Alan Winters

University of Sussex; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2014

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 simplified 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 reform, decreased the sensitivity of pay to performance of CEOs, with no significant effects found for other managers or 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, executive compensation, performance-related pay, product market competition

JEL Classification: J31, J33, M52

Suggested Citation

Ferreira, Priscila and Winters, L. Alan Alan, The Effect of Competition on Managers’ Compensation: Evidence from a Quasi-Natural Experiment (July 2014). CEPR Discussion Paper No. DP10054, Available at SSRN: https://ssrn.com/abstract=2501527

Priscila Ferreira

University of Essex

L. Alan Alan Winters

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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