How to Avoid Compensating CEO for Luck: The Case of Microeconomic Fluctuations

Lars Oxelheim, Clas Wihlborg and Jianhua Zhang ()
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Jianhua Zhang: Göteborg University, Postal: Sweden

No 842, Working Paper Series from Research Institute of Industrial Economics

Abstract: Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences on remuneration. These influences can be seen as reflecting luck from the CEO’s perspective. In this chapter we present a model for how to avoid compensating CEO for luck by filtering out the macroeconomic influences. In the empirical section we analyze the impact of macroeconomic, industry and firm-specific factors on the compensations (salary, bonus, options, and pensions) of CEOs in 127 Swedish corporations during the period 2001-2007. We find macroeconomic influences on Swedish CEOs’ compensation to be substantial. Distinguishing between favorable and unfavorable macroeconomic developments, we find compensation to be more responsive to favorable than to unfavorable developments in macroeconomic variables.

Keywords: Executive compensation; Salary; Bonus; Option; Pension; Macroeconomic uncertainty; Macroeconomic factors; Performance; Luck (search for similar items in EconPapers)
JEL-codes: L14 L16 M14 M21 M52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-06-21
New Economics Papers: this item is included in nep-bec
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Related works:
Chapter: How to Avoid Compensating the CEO for Luck: The Case of Macroeconomic Fluctuations (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0842

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