CEO Compensation in a Regulatory Environment: An Analysis of the Electric Utility Industry

1997 ◽  
Vol 12 (3) ◽  
pp. 223-251 ◽  
Author(s):  
Stephen Bryan ◽  
LeeSeok Hwang
Keyword(s):  
Ceo Compensation ◽  
Electric Utility ◽  
Regulatory Environment ◽  
Electric Utility Industry ◽  
Firm Characteristics ◽  
Investment Opportunity ◽  
Utility Industry ◽  
Political Constraints ◽  
Investment Opportunity Set ◽  
And Performance

Prior studies argue that a firm's investment opportunity set affects the level of information asymmetry and thereby the structure of CEO compensation. We test whether the political constraints imposed in a regulatory environment incrementally affect both the level and the structure of CEO compensation, while controlling for the effects of investment opportunity set and other firm characteristics. We hypothesize that increased political constraints reduce the need and the opportunity to pay management bonuses, stock options, and other incentive-based compensation, in addition to a base salary. We test our hypothesis using CEO compensation data from electric utility companies during 1990–1995. We develop refined measures for different levels of regulation and monitoring within the electric utility industry. Our results provide evidence that increased political constraints affect both the level and structure of CEO compensation, after controlling for investment opportunity set and other firm characteristics, such as firm size, systematic risk, and performance.

Discussion: “CEO Compensation in a Regulatory Environment: An Analysis of the Electric Utility Industry”

1997 ◽  
Vol 12 (3) ◽  
pp. 252-255
Author(s):  
Jacob Thomas
Keyword(s):  
Electric Utility ◽  
Affirmative Answer ◽  
The Political ◽  
Top Management ◽  
Management Compensation ◽  
Investment Opportunity ◽  
Political Constraints ◽  
Opportunity Sets ◽  
Investment Opportunity Set ◽  
Regulated Firms

There is considerable evidence indicating that top management compensation is lower—both in terms of levels as well as the sensitivity to performance—in regulated firms, relative to unregulated firms. The question is why. There are two primary explanations. The investment opportunity set view (e.g., Smith and Watts [1992]) argues that the compensation in regulated firms is lower because it is commensurate with the talent and effort required to manage the limited investment opportunities faced by those firms. The political constraints view (e.g., Joskow et al. [1993]) argues that the scrutiny of regulators and consumers limits management compensation. Although the two views are not mutually exclusive, the point of departure is whether or not top management compensation would be lower in regulated firms, after controlling for differences in investment opportunity sets. The political constraints view predicts an affirmative answer, whereas the answer should be no under the first view.

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