Abstract
This research examines the effect that the socio-economic factors associated with the headquarters location of U.S. firms have on executive compensation. Using socio economic factors to measure the quality of life associated with the location of firms' headquarters, together with the culture (beliefs, values, and preferences) of firms’ local demographics, I confirm the importance of location, and the profound affect its associated attributes can have on financial outcomes, particularly the behaviour of firms.
I find strong evidence that the socio-economic factors associated with the location of a firm’s headquarters influence executive compensation. In particular, cultural socio-economic factors, including the ratio of Catholics to Protestants, the proportion of votes that are for a Republican Presidential candidate, and the racial makeup of a firm’s local demographic are related to total compensation or the ratio of equity-to-total compensation or both. I also report evidence of compensation benchmarking as well as a quality of life (cost of living) premium incorporated into executive compensation packages.
In addition executive compensation of clustered firms (firms located in close proximity to a number of other firms) is more sensitive to both cultural and quality of life socio-economic factors than it is for non-clustered firms. This is consistent with clustering facilitating a degree of cultural transmission that further enhances the influence of socio-economic factors on executive compensation. Clustering results also provide support for prior literature documenting a reduction in the costs and difficulty of direct monitoring less remotely located firms. There is also evidence that socio-economic factors have a different influence on the executive compensation of small compared to large firms.