Compensation Disclosures and the Weaponization of Executive Pay: Evidence from Revenue-Based Performance Evaluation
60 Pages Posted: 1 Nov 2016 Last revised: 29 Jun 2018
Date Written: May 30, 2018
Large Cournot competitors add revenue-based pay into their CEOs' pay packages in response to a compensation disclosure mandate. Small firms and Bertrand competitors do not respond this way. The shift towards revenue-based pay leads to more aggressive product market equilibria, characterized by greater production expenditures and lower margins. Collectively, these patterns are consistent with the theoretical literature on "strategic delegation," which shows that influential Cournot competitors will rationally use revenue-based pay to commit to aggressive product market behavior — and thereby discipline rival behavior — but only if managers' incentives can be credibly disclosed. My findings suggest that, after the mandate, executive incentives are restructured as strategic product market weapons, designed to curtail rivals’ competitive actions.
Keywords: Strategic Delegation; Oligopoly; Commitment; Compensation; Disclosure; Competition
JEL Classification: C72; D43; D86; J33; L13; M12; M41
Suggested Citation: Suggested Citation