What Matters In Executive Compensation: Internal vs. External Governance Mechanisms

Author: Alexander Hüttenbrink (MUNICH UNIVERSITY OF TECHNOLOGY), Marc Steffen Rapp (TUM SCHOOL OF MANAGEMENT), Michael Wolff (LEIPZIG GRADUATE SCHOOL OF MANAGEMENT)

 

Track 10 - Top Management Teams & Business Elites Track (3)

We analyze the influence of institutional environment on executive pay by using a large sample of US and European firms. Our results suggest that institutional setting and regulation have a substantial impact on executive compensation. For instance, high shareholder protection reduces pay-for-performance, while high disclosure requirements increase payfor- performance. Moreover, the institutional environment moderates the relationship between firm-specific governance mechanisms and executive pay. High shareholder protection weakens the substitution effect of strong firm-specific governance mechanisms on total compensation, but enhances this substitution effect regarding pay-for-performance. Overall, our results suggest that institutional environment is an important determinant of executive remuneration.

 

Keywords: Executive Compensation, Corporate Governance, National Institutions