Abstract
Using federal contractor data, this paper examines the political costs hypothesis through the impact of government scrutiny and political sensitivity on executive compensation. The political cost hypothesis proffers that firms subject to government scrutiny take actions to deflect potential negative government reactions which can result in increased political costs for the firm. Results suggest that government contractor firms with the most political sensitivity (i.e., firms with government contracts that are most visible and comprise significant portions of their revenue) are associated with lower total (and excess) compensation to their CEOs, but with larger portions of cash, leading to lower long-term CEO wealth performance sensitivity. However, politically sensitive contractors with significant bargaining power (due to concentration, competition, or political contributions), are actually associated with greater excess compensation than other politically sensitive firms. These findings provide insight into the effects and limitations of additional government monitoring of executive compensation.
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