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Executive compensation and political sensitivity: Evidence from government contractors

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  • Hadley, Brandy

Abstract

Using federal contractor data, this paper examines the political costs hypothesis through the impact of government scrutiny and political sensitivity on executive compensation. The political cost hypothesis proffers that firms subject to government scrutiny take actions to deflect potential negative government reactions which can result in increased political costs for the firm. Results suggest that government contractor firms with the most political sensitivity (i.e., firms with government contracts that are most visible and comprise significant portions of their revenue) are associated with lower total (and excess) compensation to their CEOs, but with larger portions of cash, leading to lower long-term CEO wealth performance sensitivity. However, politically sensitive contractors with significant bargaining power (due to concentration, competition, or political contributions), are actually associated with greater excess compensation than other politically sensitive firms. These findings provide insight into the effects and limitations of additional government monitoring of executive compensation.

Suggested Citation

  • Hadley, Brandy, 2019. "Executive compensation and political sensitivity: Evidence from government contractors," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 276-301.
    • Handle: RePEc:eee:corfin:v:59:y:2019:i:c:p:276-301
    DOI: 10.1016/j.jcorpfin.2016.11.007
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    3. D. Brian Blank & Brandy Hadley & Omer Unsal, 2021. "Financial consequences of reputational damage: Evidence from government economic incentives," The Financial Review, Eastern Finance Association, vol. 56(4), pages 693-719, November.

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    More about this item

    Keywords

    Executive compensation; Political sensitivity; Government contractors; Bargaining power; Corporate governance;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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