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Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry

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  • Paul L. Joskow
  • Nancy L. Rose
  • Catherin D. Wolfram

Abstract

This study explores the effect of regulatory and political constraints on the level of CEO compensation for 87 state-regulated electric utilities during 1978-1990. The results suggest that political pressures may constrain top executive pay levels in this industry. First, CEOs of firms operating in regulatory environments characterized by investment banks as relatively `pro-consumer' receive lower compensation than do CEOs of firms in environments ranked as more friendly to investors. Second, CEO pay is lower for utilities with relatively high or rising rates, or a higher proportion of industrial sales, consistent with earlier research that describes political pressures on electricity rates. Finally, attributes of the commission appointment and tenure rules affect CEO compensation in ways consistent with the political constraint hypothesis: for example, pay is lower in states with elected commissioners than in states where commissioners are appointed by the governor, all else equal. Despite apparently effective pressure to constrain pay levels in this sector, however, we find no evidence of related intra-industry variation in the sensitivity of pay to firm financial performance.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4980.

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Date of creation: Dec 1994
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Publication status: published as RAND Journal of Economics, Spring 1996, 27(1):165-182.
Handle: RePEc:nbr:nberwo:4980

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  1. Gibbons, R. & Murphy, K.J., 1989. "Relative Performance Evaluation For Chief Executive Officers," Working papers 532, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Joskow, Paul L. & Rose, Nancy L. & Shepard, Andrea., 1993. "Regulatory constraints on executive compensation," Working papers 3550-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Robert L. Hagerman & Brian T. Ratchford, 1978. "Some Determinants of Allowed Rates of Return on Equity to Electric Utilities," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 46-55, Spring.
  4. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
  5. Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
  6. Smiley, Robert H. & Greene, William H., 1983. "Determinants of the effectiveness of electric utility regulation," Resources and Energy, Elsevier, vol. 5(1), pages 65-81, March.
  7. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  8. Sloan, Richard G., 1993. "Accounting earnings and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 55-100, April.
  9. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  10. Noll, Roger G., 1989. "Economic perspectives on the politics of regulation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 22, pages 1253-1287 Elsevier.
  11. Peter Navarro, 1982. "Public Utility Commission Regulation: Performance, Determinants, and Energy Policy Impacts," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 119-140.
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Cited by:
  1. Mixon Jr, Franklin G. & W. McKenzie, Russell, 1999. "Managerial tenure under private and government ownership: the case of higher education," Economics of Education Review, Elsevier, vol. 18(1), pages 51-58, February.
  2. Brian J. Hall & Kevin J. Murphy, 2000. "Stock Options for Undiversified Executives," NBER Working Papers 8052, National Bureau of Economic Research, Inc.
  3. Dey, Oindrila & Banerjee, Swapnendu, 2010. "Incentive, status and thereafter: A critical survey," MPRA Paper 57058, University Library of Munich, Germany.
  4. Carsten Burhop & Christian Bayer, 2004. "A Corporate Governance Reform As A Natural Experiment For Incentive Contracts," Royal Economic Society Annual Conference 2004 149, Royal Economic Society.
  5. Becher, David A. & Frye, Melissa B., 2011. "Does regulation substitute or complement governance?," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 736-751, March.
  6. Mixon Jr., Franklin G. & Upadhyaya, Kamal P., 1999. "The impact of economic regulation on attempts to curb expense preference behavior: a micro-data analysis of CEO compensation schemes for electric utilities," Energy Economics, Elsevier, vol. 21(2), pages 185-194, April.
  7. Cuñat, Vicente & Guadalupe, Maria, 2004. "Executive Compensation and Competition in the Banking and Financial Sectors," CEPR Discussion Papers 4425, C.E.P.R. Discussion Papers.
  8. Johnson, Marilyn F. & Nelson, Karen K. & Shackell, Margaret B., 2001. "An Empirical Analysis of the SEC's 1992 Proxy Reforms on Executive Compensation," Research Papers 1679, Stanford University, Graduate School of Business.
  9. Christian Bayer & Carsten Burhop, 2008. "Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_11, Max Planck Institute for Research on Collective Goods.
  10. John DiNardo & Kevin Hallock & Jorn-Steffen Pischke, 1997. "Unions and Managerial Pay," NBER Working Papers 6318, National Bureau of Economic Research, Inc.
  11. Simon Grant & Stephen King & Ben Polak, 1995. "Information Externalities, Share-Price Based Incentives and Managerial Behaviour," Cowles Foundation Discussion Papers 1107, Cowles Foundation for Research in Economics, Yale University.
  12. Perry, Tod & Zenner, Marc, 2001. "Pay for performance? Government regulation and the structure of compensation contracts," Journal of Financial Economics, Elsevier, vol. 62(3), pages 453-488, December.
  13. Nancy L. Rose & Catherine Wolfram, 2000. "Regulating Executive Pay: Using the Tax Code to Influence CEO Compensation," NBER Working Papers 7842, National Bureau of Economic Research, Inc.
  14. Li, Donghui & Moshirian, Fariborz & Nguyen, Pascal & Tan, Liwen, 2007. "Corporate governance or globalization: What determines CEO compensation in China?," Research in International Business and Finance, Elsevier, vol. 21(1), pages 32-49, January.

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