Paul L. Joskow, Nancy Rose, and Andrea Shepard, March 1993
This paper explores the influence of economic regulation on the level and structure of executive compensation. We find substantial and persistent differences in CEO compensation between firms subject to economic regulation and those in unregulated industries. CEOs of regulated firms are paid substantially less, on average, than their counterparts in the unregulated sector. In particular, in the electric utility industry, the sector which is most tightly regulated and for which we have the most data, CEOs average only 30% to 50% of the compensation earned by the CEO of a comparable firm in the unregulated sector. Compensation in the regulated sector tends to be more heavily weighted toward salary and cash and away from incentive-based forms of pay (such as stock options), and tends to be less responsive to variations in firm financial performance. The pattern of compensation discounts across industries, over time, and between firms in the electric utility industry is broadly consistent with the presence of binding political constraints on executive pay, as medicated through the regulatory process.