Management Accounting Section Midyear Meeting

Disturbing the Quiet Life? Competition, Incentives, and Performance Target Difficulty

• In Event: Incentives and Retention

Abstract

Although many studies argue that product market competition acts as a disciplining mechanism that increases incentive strength and managerial effort, empirical evidence to support this argument is still limited. We use a new measure of competition that aggregates information about multiple known determinants of competition as well as its consequences for firm profits and CEO pay. Consistent with the theory that competition reduces rents, our measure is associated with lower accounting performance, market valuation, CEO salaries, ex post incentive awards, and total pay. In our main analysis, we examine how competition affects incentive strength. In contrast to prior work, we predict and find that competition is negatively associated with equity portfolio incentives as measured by delta. Nevertheless, we also show that competition is associated with stronger incentives as reflected in a higher sensitivity of ex post CEO total pay to accounting and stock returns as well as a higher ex ante bonus-earnings sensitivity. Finally, we examine the effect of competition on performance target difficulty. We find that competition is associated with greater ex ante target difficulty but also with a greater likelihood of achieving the more challenging performance targets. Taken together, these findings suggest that managers work harder but get paid less in highly competitive environments.

Authors

• Stephan Kramer, RSM Erasmus University

• Michal Matejka, Arizona State University - Tempe