Incentive Compensations in Energy Firms: Does Regulation Matter?

This paper develops a link between regulation and the two main competing theories of executive compensation (efficiency vs. entrenchment view) and investigates if CEO pay-performance sensitivity differs across alternative regulatory regimes in the European energy industry. Using a panel of energy utilities from 12 EU countries tracked from 2000 to 2011, we find that managerial compensation is sensitive to performance only if the firm is subject to incentive regulation, not in the case of cost-based contracts. We also find that incentive regulation makes managerial entrenchment less likely, while CEOs subject to cost-based regulation appear to be more entrenched with the board, obtaining compensations that may even increase when (accounting) performance deteriorates.