CEO incentives in European energy utilities: evidence from regulated versus unregulated firms

This paper studies the effect of incentive mechanisms provided by economic regulation and CEO compensation in European energy firms. We investigate the differences in CEO pay-for-performance sensitivity across regulated and unregulated firms on CEO monetary incentives. Using various measures of firm performance, we find that CEO pay-for-performance sensitivity is lower in regulated companies. These results hold when we control for national corporate governance variables (investor protection, legal origin, disclosure requirements and contract enforcement). Our findings suggest that incentive compensation is a weaker incentive mechanism for firms operating in regulated and less-competitive markets.