Spillover Effects of Executive Compensation Restriction

In this paper, I use a unique law that sets a binding upper limit on financial firms' executive compensation in Israel and study its spillover effects on executive compensation in the non-restricted firms. The results indicate that the legislation created an anchoring effect at the threshold level, as the compensation of executives paid above it decreased after legislation, while the compensation of executives paid below it, as some evidence suggests, increased. This result is consistent with the theories based on the market for CEO talent: market forces, such as the supply and demand for CEO talent, drive competitive compensation packages. The analysis demonstrates that there is a single market for top executives, and by capping the compensation for some of them, the equilibrium compensation is changed for others as well