published in: Journal of Banking and Finance, 2009, 33 (3), 495-504
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 US 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.
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