Trade Associations and Shared Industry Governance

We propose that trade associations induce member firms to adopt executive compensation schemes that put higher weight on industry performance relative to firm performance.  An extension to classical managerial effort theory predicts this outcome.  We empirically test theoretical predictions and find strong support along five dimensions: (1) plausibly exogenous shifts in trade association memberships leads to less relative performance evaluation (RPE), (2) TA members avoid other members as RPE benchmarks but prefer them as compensation peers, (3) these results do not obtain for non-TA industry peers, (4) mechanism tests favor implicit implementation of pay contracts over visible contractual provisions, and (5) a quasi-natural experiment illustrates that the resulting incentive plans are highly effective. These results illustrate a new industry dimension of executive pay that incentivizes collaborative value creation.