Determinants of executive incentive pay in Europe

Abstract

In this paper we study possible determinants of the use of incentive pay for managers in European companies. Data from 5,000 firms in 15 countries are used to analyze the degree to which incentive pay is associated with national embeddedness, local labour market institutions, ownership, and internationalization of markets. We find that companies in countries with high scores on power distance and individualism tend to use incentive schemes for managers more frequently than companies with lower scores on these cultural dimensions. Centralized wage bargaining and unionization at the firm level tend to reduce the prevalence of such schemes. Incentive pay is less common in state-owned companies than in privately owned firms. The findings also reveal that the more global the market in which a firm operates, the greater the probability that it will implement incentive pay elements for its managers. Our results suggest that unions, national labour market institutions and social and cultural norms serve as buffers against the introduction of US-style compensation systems