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The effect of supplier industry competition on pay-for-performance incentive intensity

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  • Carter, Mary Ellen
  • Choi, Jen
  • Sedatole, Karen L.

Abstract

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).

Suggested Citation

  • Carter, Mary Ellen & Choi, Jen & Sedatole, Karen L., 2021. "The effect of supplier industry competition on pay-for-performance incentive intensity," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    • Handle: RePEc:eee:jaecon:v:71:y:2021:i:2:s0165410121000045
    DOI: 10.1016/j.jacceco.2021.101389
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    3. Xu, Tianli & Xu, Longbing & Zhu, Siyuan, 2023. "Common ownership and executive pay-for-performance sensitivity: Evidence from China," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Park, Sohee, 2023. "Customer prospects and pay-performance sensitivity: Evidence from Korea," Research in International Business and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Executive compensation; Incentive pay; Supplier market competition;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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