Institutional investors’ monitoring attention, CEO compensation, and relative performance evaluation

This paper examines whether the monitoring attention of institutional investors can influence CEO compensation. We find that higher motivated monitoring institutional ownership (IO) is associated with higher pay-performance-sensitivity of CEO compensation. Further, we find that only institutional investors with very high monitoring attention can positively affect the pay-performance-sensitivity. Finally, we document that CEO pay-performance-sensitivity is more, if not only, related to the unsystematic component of corporate performance in firms with higher monitoring IO. Collectively, our findings support the argument that firms with more monitoring IO provides more incentive compensation contract