The role of the state as controlling shareholder in the telecoms: Incentive versus entrenchment theory

In this study we investigate the role played by the state as controlling shareholder in setting CEO incentives. Analyzing listed telecommunication companies from 13 European countries during 1999-2013, we measure the difference between the state and a private dominant shareholder in setting CEO compensation packages. We find that state control curbs the level of CEO compensation and this effect weakens as the state’s ownership stake increases. When we focus on CEO incentive compensation, we report that CEO pay for performance sensitivity is higher for state controlled firms than for private firms. However, as the state’s ownership stake increases, differences in sensitivity tend to disappear, but the effect of governance variables commonly used to proxy entrenchment becomes statistically significant.