Industry Attributes and Their Influence on Managerial Pay and the Use of Performance Measures

Abstract

While most prior research has examined how firm characteristics influence the firms’ use of performance measures to evaluate their managers, little research has been conducted on how industry characteristics affect the weights placed on these measures. Industry factors that determine product market competition like product substitutability, market size, and barriers to entry, as well as other factors like investment opportunities and uncertainty/risk in the industry are shown to influence the weights placed on earnings-, stock-, and cost-based performance measures to evaluate managers in firms. Furthermore, whether firms belong to the manufacturing or service industrial sectors, or operate in deregulated versus regulated industries also has an impact on the weights placed on these measures. This study contributes to the literature by providing comprehensive evidence on the importance of considering cost-based performance measures in compensation studies and how industry attributes play a vital role in how firms use performance measures to evaluate their managers.