1 Incentive Compensation in Energy Firms: Does Regulation Matter?  Carlo Cambini * , Laura Rondi † , Sara De Masi ‡ Manuscript Type: Empirical Research Question/Issue: The impact of regulation on managers’ incentive is unclear. While regulation reduces the discretion of CEOs, it is also expected to prompt effort and efficiency. This paper investigates if CEO pay-performance sensitivity differs across different regulatory regimes and industry segments in the European energy industry. Research Findings/Insights: Using a panel of recently unbundled energy utilities from 12 EU countries tracked from 2000 to 2011, we find that managerial compensation is sensitive to performance only if the firm is subject to incentive regulation, not in the case of cost-based regulation. Results hold when we control for state ownership, market liberalization and shareholder protection, and suggest that the implementation of incentive regulatory schemes like price-cap propels shareholders to change their compensation policies to reduce managerial slack, and align executive behaviors more tightly with the investors’ interests. Theoretical/Academic Implications: This study draws on corporate governance and regulation literatures to develop testable predictions about the relationship between “external” – regulatory mechanism – and “internal” – compensation contract – incentives to align managers and shareholders’ interests. We do so by spelling out the features of regulatory regimes that may translate into, substitute or complement performance- based governance mechanism. Practitioner/Policy Implications: Our findings for a representative sample of large and highly valued European energy companies offer insights to financial investors to pay attention not only to remuneration schemes, but also to regulatory regimes. Indeed, we find that regulatory regimes do matter and that firms subject to high-powered incentive schemes are more similar to unregulated companies. In contrast, the adoption of performance-related contracts for energy utilities under cost-based schemes seems to bring no advantage to firms and only additional costs to shareholders. JEL classification: G3, G38, J33, L51 Key words: Managerial compensation; Incentive contracts; Regulation; Corporate Governance; European utilities  We thank the Editor, the Associate Editor, two anonymous referees, and Aleksandra Gregoric, John Kose, John Kwoka, Nicola Meccheri, Christian Nielsen, Jason Pearcy, Michele Polo, Robert Ritz, David E.M. Sappington and seminars participants at Copenhagen Business School-Centre for Corporate Governance, the 12 th Annual International Industrial Organization Conference (Chicago, 2014), the 41 st EARIE Annual Meeting (Evòra, 2013), Stern School of Business NYU, University of Naples, University of Pisa, for comments and suggestions on an earlier version of the paper. * Politecnico di Torino - Department of Management (DIGEP) & IEFE-Bocconi University, Milan. Email, carlo.cambini@polito.it † Corresponding author: Politecnico di Torino - Department of Management (DIGEP). Email, laura.rondi@polito.it ‡ University of Florence, via delle Pandette 9, 50127 Florence, Italy. Email: sarademasi@gmail.com