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CEP discussion paper
Executive Compensation and Product Market Competition
Vicente Cuñat and María Guadalupe
February 2004
Paper No' CEPDP0617:
Full Paper (pdf)

JEL Classification: M52; L1; J31

Tags: executive compensation; product market competition; performance related pay

The aim of this paper is to study the effects of product market competition on the explicit compensation packages that firms offer to their executives. In order to measure the net effect of competition we use two different identification strategies. The first exploits cross sectoral variation in concentration ratios and the panel nature of the dataset. The second uses as a quasi-natural experiment the deregulations that occurred in the banking and financial sectors in the nineties and estimates differences in differences coefficients. Our results show that a higher level of product market competition increases the performance pay sensitivity of executive compensation schemes, and they hold through a number of performance measures such as stock options or bonus. The results are robust to a number of specification checks.