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Effectiveness of Executive Compensation Cap Law: Evidence from Israel

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  • Meital Graham Rozen

    (Bank of Israel)

Abstract

The relationship between executive compensation and firm performance is highly endogenous. This paper uses a unique Israeli law that imposes a binding upper limit on financial firms' executive compensation as an exogenous shock to examine its effects on compensation structure, executive turnover, firm performance, risk-taking, and topexecutive pay disparity. By exploiting the fact that this law only restricts executive pay in certain types of financial firms, a difference-in-difference approach is used. The findings suggest that the significant reduction in executive pay following the law's enactment did not decrease corporate performance or risk-taking. Instead, it led to higher executive turnover, a reduction in variable compensation, and a narrower pay gap among top executives.

Suggested Citation

  • Meital Graham Rozen, 2024. "Effectiveness of Executive Compensation Cap Law: Evidence from Israel," Bank of Israel Working Papers 2024.07, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2024.07
    as

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    References listed on IDEAS

    as
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