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How Does Product Market Competition Shape Incentive Contracts?

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  • Vicente Cuñat
  • María Guadalupe
Abstract
This paper studies the effect of product market competition on the explicit compensation packages that firms offer to their CEOs, executives and workers. We use a large sample of both traded and non-traded UK firms and exploit a quasi-natural experiment associated to an increase in competition. The sudden appreciation of the pound in 1996 implied different changes in competition for sectors with different degrees of openness. Our difference in differences estimates show that a higher level of product market competition increases the performance pay sensitivity of compensation schemes, in particular for executives.

Suggested Citation

  • Vicente Cuñat & María Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," CEP Discussion Papers dp0687, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0687
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    More about this item

    Keywords

    Performance-related pay; Product market competition;

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J49 - Labor and Demographic Economics - - Particular Labor Markets - - - Other

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