Escaping Pay-for-Performance

59 Pages Posted: 15 Apr 2024

See all articles by Jason (Pang-Li) Chen

Jason (Pang-Li) Chen

Harbert College of Business, Auburn University

Jakub Hajda

HEC Montreal - Department of Finance

Joseph Kalmenovitz

University of Rochester - Simon Business School

Date Written: March 16, 2024

Abstract

Should we pay regulators for performance? To answer the question, we use a unique dataset that tracks the careers of 26,000 senior federal regulators. They are the highest-ranking bureaucrats in the federal government who collectively oversee the plurality of regulatory activities in the United States. We find that the adoption of a pay-for-performance system accelerated the revolving door, as senior regulators voluntary left for the private sector. To understand this dynamic, we build a structural model which highlights two crucial features: government pay is capped, and regulators can accept a private sector job with uncapped pay. Performance pay may induce more effort, but since regulators risk hitting the pay cap, they prefer to move to the private sector where effort is rewarded even more. Estimating our model, we find that 21% of executive pay in the federal government is performance-based. Moreover, performance pay has large quantitative impact: a 1% increase in pay-for-performance will increase effort by 0.04% and exits by 7.24%. We design alternative executive pay packages, which combine a stronger pay-for-performance component with a higher pay cap, to increase regulatory effort without accelerating the revolving door. Combined, our results shed new light on how regulators respond to performance-based pay.

Keywords: revolving door, executive pay, regulatory burden, compensation incentives

Suggested Citation

Chen, Jason (Pang-Li) and Hajda, Jakub and Kalmenovitz, Joseph, Escaping Pay-for-Performance (March 16, 2024). Available at SSRN: https://ssrn.com/abstract=4761680 or http://dx.doi.org/10.2139/ssrn.4761680

Jason (Pang-Li) Chen

Harbert College of Business, Auburn University ( email )

Auburn, AL 36849
United States

Jakub Hajda

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Joseph Kalmenovitz (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://sites.google.com/view/jkalmenovitz

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