1 Product Market Competition, Executive Compensation, and CEO Family Ties* Clara Graziano ** (University of Udine) Laura Rondi*** (Politecnico di Torino) Abstract This paper analyzes the interaction between product market competition and family ties on the structure of CEO pay, in a panel of publicly listed family firms. To account for the multi-dimensional nature of com- petition we use a variety of measures. We find that in industries where import penetration is high, products are differentiated or domestic concentration is high, family CEOs’ variable pay is lower than is professional CEOs’ variable pay; but the former is more closely related to firm performance. This result remains strong when we account for the equity component of compensation and for endogeneity concerns and when we test the hypothesis of family CEOs’ “pay for luck”. Our findings suggest that: i) competition is likely to substitute incentive pay in homogeneous product markets and to complement them in differentiated indus- tries and in markets that are open to international trade; and ii) product market characteristics are more important than are family ties in shaping managerial compensation. Keywords: CEO compensation; product market competition; family firms; import penetration; R&D and advertising intensity; corporate governance; pay-performance sensitivity JEL classification: L22; D22; G30; J33; M52 * We thank Laura Abrardi, Erich Battistin, Luigi Benfratello, Alex Edmans, Susanne Espenlaub, Miguel Garcia-Cestona, Marc Goergen, Maria Guadalupe, Dennis Mueller, Neslihan Ozkan, Bogdan Stacescu, Steve Thompson, Dmitri Vinogradov, and seminar participants at 2015 EARIE Conference, 3rd International Conference on Applied Research in Economics (Perm, RU), Trento University, the 16 th Work- shop on Corporate Governance and Investment (Manchester), 2016 CESifo area conference on Applied Microeconomics, 2016 Workshop of the SIEPI (Florence), the 57 th SIE Annual Meeting, (Bocconi University) and 2016 ASSET Annual Meeting in Thessaloniki for com- ments and suggestions on earlier versions of the paper. The usual disclaimers apply. ** Department of Economics, University of Udine, via Tomadini 30, 33100 Udine, Italy and CESifo; . *** Corresponding author: Department of Management (DIGEP), Politecnico di Torino, Corso Duca degli Abruzzi, 24, 10129 Torino, Italy. Tel: + 39-0110907232, fax: +39-011-0907299, Email: laura.rondi@polito.it