Executive Compensation and Competition in the Banking and Financial Sectors

Abstract

This Paper studies the effect of product market competition on the compensation packages that firms offer to their executives and in particular its impact on the sensitivity of pay to performance. To measure the effect of competition, we use two different identification strategies on a panel of U.S. executives. We exploit two deregulation episodes in the banking and financial sectors as quasi-natural experiments. We provide difference in differences estimates of the effect of competition on estimated performance-pay sensitivities and on the sensitivity of stock option grants. Our results indicate that a higher level of product market competition increases the performance pay sensitivity of executive compensation schemes.

Keywords: Executive compensation, product market competition, performance related pay

JEL Classification: J31, L10