Orders of Merit and CEO Compensation: Evidence from a Natural Experiment
Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research
July 4, 2012
Governments worldwide bestow orders of merit upon their citizens as a recognition of distinguished service. In this paper, I develop hypotheses on how orders of merit can function as a tool for governments to impact pay at public corporations. The predictions are tested through an empirical analysis that revolves around the 1974 legal reform in which Sweden discontinued the conferral of orders of merit to citizens. The difference-in-difference methodology I employ enables me to make causal statements on the relationship between orders of merit, firm performance and monetary compensation. I find that orders of merit function as symbols that visibly confirm social status vis-à-vis the general public and are valued by CEOs as a substitute for the need to engage in conspicuous consumption. Essentially, orders of merit can be seen as an external form of perquisite through which the government can effectively subsidize part of the compensation for CEOs of privately owned firms.
Keywords: Executive compensation, positional good, order of merit
JEL Classification: G30, J33
Date posted: October 16, 2014 ; Last revised: March 17, 2015
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