Hartzell, Jay C. and Laura T. Starks. "Institutional Investors and Executive Compensation." The Journal of Finance. December, 2003.

This very thorough and careful study examines the relationship between institutional ownership and executive pay over the 1992 - 1997 time period. Finds that a higher degree of institutional ownership is associated with greater performance sensitivity in the CEO's compensation and lower level of executive pay, even after adjusting for firm size, industry, investment opportunities, and performance. The authors also demonstrate that changes in institutional ownership are associated with subsequent changes in executive pay, but not vice-versa.

"These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers."

This finding is interesting in light of the larger debate around institutional ownership of U.S. equities in general. See especially Hawley and Williams (2000).