The Effect of Supplier Industry Competition on Pay-for-Performance Incentive Intensity

63 Pages Posted: 18 Aug 2018 Last revised: 1 Feb 2021

See all articles by Mary Ellen Carter

Mary Ellen Carter

Boston College - Department of Accounting

Jen Choi

Goizueta Business School

Karen Sedatole

Goizueta Business School

Date Written: November 1, 2020

Abstract

We examine how competition in supplier industries affects CEO incentive intensity in procuring firms. Using the Input-Output Accounts Data published by the Bureau of Economic Analysis, we compute a weighted supplier industry competition measure. We then predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to the effect of competition in the firm’s own industry documented in prior research and is robust to using alternative measures of supplier competition as well as to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm’s benefit. Our findings are economically important as external suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA 2016).

Keywords: industry competition, executive compensation, pay-for-performance incentives

JEL Classification: M1, M4

Suggested Citation

Carter, Mary Ellen and Choi, Jae Eun and Sedatole, Karen, The Effect of Supplier Industry Competition on Pay-for-Performance Incentive Intensity (November 1, 2020). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3234064 or http://dx.doi.org/10.2139/ssrn.3234064

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Jae Eun Choi (Contact Author)

Goizueta Business School ( email )

Atlanta, GA
United States

Karen Sedatole

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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