Micro-DYN Working Paper no. 08/10

Introduction -- Institutional setting and hypotheses -- Data and descriptive statistics -- Data and descriptive statistics --

This paper examines the importance of reference values for executive compensation contracts. We rely on a quasi-experimental setting (the adoption of pay guidelines), and a well-defined measure of individual-specific reference values to provide evidence on how a change in CEO reference compensation leads to subsequent changes of actual pay. We find that executive compensation adjusts gradually towards the new reference values, and that the speed of the adjustment depends on the corporate governance characteristics: the firm ownership structure, the role of the State and of the employees in the firm decision making. These results provide evidence for an introduction of reference values in theoretical models of bargaining.