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This paper examines the hypothesis that changes in executive compensation contracts are an organizational response to shifts in the firm's external environment and/or corporate strategy. In particular, we consider whether the initial adoption of compensation contracts for senior executives in the electric utility industry is associated with a regulatory shift from a "cost-plus" revenue function to one explicitly linked to productive efficiency, the level of production efficiency, and diversification into unregulated business activities. We study the electric utility industry for several reasons. Electric utilities exhibit considerable variation in their executive compensation contracts, while their relatively homogenous production functions enhance the internal validity of our cross-sectional analysis of production efficiency. In addition, some electric utilities have experienced both substantial regulatory changes (i.e., institution of "incentive regulation") and diversification into unregulated businesses that should, in theory, influence the compensation arrangements. |
