Abstract
The relationship between executive compensation and firm performance is highly endogenous. This paper uses a unique Israeli law that imposes a binding upper limit on financial firms' executive compensation as an exogenous shock to examine its effects on compensation structure, executive turnover, firm performance, risk-taking, and top-executive pay disparity. By exploiting the fact that this law only restricts executive pay in certain types of financial firms, a difference-in-difference approach is used. The findings suggest that the significant reduction in executive pay following the law's enactment did not decrease corporate performance or risk-taking. Instead, it led to higher executive turnover, a reduction in variable compensation, and a narrower pay gap among top executives.
Keywords: Executive compensation, Financial Institutions, Regulation