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Product Market Competition and Executive Compensation: An Empirical Investigation

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  • Patricia Funk
  • Gabrielle Wanzenried

Abstract

There is an ongoing theoretical debate about whether firm-owners would optimally use stronger or weaker incentive schemes for their managers as productmarket competition increases. Schmidt (1997) shows that the outside options of the managers play a crucial role: if the market for managers is soft, an increase in competition is more likely to result in stronger incentive schemes than if the market for managers is tough. In this paper, we for the first time analyze the effects of product market competition on the level and structure of executive compensation. With panel-data for firms in the the U.S. manufacturing industries (NAICS 32-33), we investigate (a) how an increase in product market competition affects the use of incentive contracts and (b) whether this relationship depends on the outside options of the managers as predicted by theory.

Suggested Citation

  • Patricia Funk & Gabrielle Wanzenried, 2003. "Product Market Competition and Executive Compensation: An Empirical Investigation," Diskussionsschriften dp0309, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp0309
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    References listed on IDEAS

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    1. Benjamin E. Hermalin, 1992. "The Effects of Competition on Executive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 350-365, Autumn.
    2. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-1177, December.
    3. George P. Baker & Brian J. Hall, 1998. "CEO Incentives and Firm Size," NBER Working Papers 6868, National Bureau of Economic Research, Inc.
    4. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    5. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    8. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
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    Cited by:

    1. Michaelides, Panayotis G. & Tsionas, Efthymios G. & Konstantakis, Konstantinos N. & Xidonas, Panos, 2019. "The impact of market competition on CEO salary in the US energy sector1," Energy Policy, Elsevier, vol. 132(C), pages 32-37.
    2. Stefan Beiner & Markus M. Schmid & Gabrielle Wanzenried, 2011. "Product Market Competition, Managerial Incentives and Firm Valuation," European Financial Management, European Financial Management Association, vol. 17(2), pages 331-366, March.

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    More about this item

    Keywords

    CEO compensation; product market competition; incentive schemes;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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