Product Market Competition and Managerial Pay

ABSTRACT In this study I find that product substitutability has a negative relation with pay-earnings but no relation with pay-stock return sensitivity, whereas market size and ease of entry have no relation with pay-earnings but a positive relation with pay-stock return sensitivity. These findings collectively imply that firms in more competitive industries place less reliance on earnings-based and greater reliance on stock-based measures to determine managerial compensation than firms in less competitive industries. I also find that product substitutability has a positive relation whereas market size and ease of entry have negative relations with managerial pay levels, suggesting different dimensions of product market competition may have independent influences on managerial pay design. Finally, I find that industry regulation has a positive relation with pay-earnings but a negative relation with pay-stock return sensitivity. This study's findings suggest a contextual approach to examining the relation between industry attributes and managerial pay. JEL Classifications: D4; G34; J33; L1; M40; M41; M46. Data Availability: Data are available from the public sources cited in the text.