Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition

This article studies the effect of changes in foreign competition on the structure of compensation and incentives of U. S. executives. We find that import penetration (instrumented with exchange rates and tariffs) leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it increases within-firm pay differentials between executive levels, with CEOs typically experiencing the largest wage increases. Finally, higher foreign competition is also associated with a higher demand for talent. These results suggest that increased foreign competition can explain some of the recent trends in compensation structures.