Compensation Disclosures and the Weaponization of Executive Pay: Evidence from Revenue-Based Performance Evaluation

Analytical work on strategic delegation shows that Cournot competitors can boost their profitability by using revenue-based pay to commit to more aggressive behavior (Fershtman and Judd, 1987), but only if pay packages are credibly disclosed (Katz, 1991). However, no empirical evidence demonstrates that firms actually employ such strategies. I exploit a regulatory shock that forced public firms to provide detailed executive pay disclosures, and document that large Cournot competitors adopt revenue-based pay in response to the disclosure mandate. Smaller firms and Bertrand competitors do not respond in this fashion. I find no evidence that agency theory can explain these patterns. Collectively, my results are consistent with strategic delegation, and suggest that, after the mandated disclosure of executive compensation packages, firms design their incentive contracts as strategic weapons, designed to curtail their rivals' competitive actions.