1 Pay me Right : Reference values

The increasing disparity between executive compensation and firm performance, and outrageously high compensation levels has stimulated discussions on introduction of some form of pay regulation. The implications of such systems are however poorly understood. In this paper we investigate a specific case of introduction of executive remuneration Code in Slovenia, which provides some interesting insights related to the current regulatory discussions. In the 1990s, the Association of Managers drafted a self-regulatory document (allegedly to prevent too high pay disparities), which proposed new structure and levels of the managerial pay. These propositions initially stimulated large public discussions, which finally led to adoption of ‘Criteria’ on the executive pay in 1997. The aim of the document was to re-define the appropriate remuneration for the CEOs. In other words, it introduced new reference values for pay negotiations at the firm levels. Based on a sample of 668 firms in the period of 1997-2003, we show how these reference values triggered pay adjustments for incumbent CEOs as well as influenced compensation contracts for newly appointed CEOs. While promoting a moderate increase in the managerial pay, the Criteria constrained its overall level by linking it to a multiplier of the average wage in the firm and in the economy. We find that a large part of the increase in the executive compensation can be attributed to the increase in the average wage of firm employees, which was a constitutive element of the reference pay. However, the executive pay adjusted in response to the reference values, also beyond the changes in the average employee pay. Larger distance from reference values elicited stronger adjustments. In contrast with previous studies, we observe no asymmetry in the * We are grateful to Zala Kalan and other employees of the Slovenian Statistical Office for the help in data organization. We would like to thank Bersant Hobdari, Frank Hartmann, Igor Masten, Marizah Minhat, the participants of the EFM Symposium on Corporate Governance and Control (Cambridge, April 2009), the participants of the Firm-Level Data Analysis in Transition and Developing Economies conference (Edinburgh, April 2009) and participants of the CG workshop at the Centre for Corporate Governance, Copenhagen Business School (February, 2009) for their suggestions and comments on earlier versions of this paper. † Copenhagen Business School, Department of International Economics and Management, Centre for Corporate Governance and ECGI. E-mail: [email protected]. (the corresponding author) ‡ Faculty of Economics, University of Ljubljana and Institute for Economic Research. E-mail: [email protected]. § Faculty of Economics, University of Ljubljana. E-mail: [email protected].