The effect of competition on executive compensation and incentives: evidence from a quasi-natural experiment
journal contribution
posted on 2023-06-09, 12:20authored byAnna P Fernandes, Priscila Perreira, L. Alan Winters
This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment, and exploit its staggered implementation across municipalities for identification. Using employer-employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.