Executive compensation and firm performance in Italy

Abstract We use survey data to investigate the determinants of executive pay in a sample of Italian firms. To the best of our knowledge this is the first empirical study on the compensation of Italian executives. Our key hypothesis is that the characteristics of the Italian capital market, corporate governance and the specific relationship between banks and firms imply a low fraction of incentive pay over total compensation and a low sensitivity of incentive pay to firm performance. We find evidence that supports this hypothesis. We estimate that an increase of real profits per firm by 1 billion lire increases the pay of upper and middle managers by only 31 thousand lire, more than the increase found for lower management (6 thousand). Furthermore, pay–performance sensitivity is higher in foreign-owned firms, in listed firms, and in firms affiliated to a multinational group.

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