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

Thomas, R and J. Hill (eds.), Research Handbook on Executive Pay. London: Edgar Elgar Publishing, Forthcoming

IFN Working Paper No. 842

38 Pages Posted: 24 Jun 2010 Last revised: 28 Jan 2013

See all articles by Lars Oxelheim

Lars Oxelheim

Research Institute of Industrial Economics (IFN); University of Agder; Knut Wicksell Center for Financial Studies, Lund University

Clas Wihlborg

Chapman University; University West

Jianhua Zhang

University of Gothenburg - School of Business, Economics and Law

Date Written: May 6, 2010

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, luck, salary, bonus, option, pension, macroeconomic uncertainty, macroeconomic factor

JEL Classification: L14, L16, M14, M21, M52

Suggested Citation

Oxelheim, Lars and Wihlborg, Clas and Zhang, Jianhua, How to Avoid Compensating CEO for Luck: The Case of Macroeconomic Fluctuations (May 6, 2010). Thomas, R and J. Hill (eds.), Research Handbook on Executive Pay. London: Edgar Elgar Publishing, Forthcoming, IFN Working Paper No. 842, Available at SSRN: https://ssrn.com/abstract=1629155 or http://dx.doi.org/10.2139/ssrn.1629155

Lars Oxelheim (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
SE-10215 Stockholm
Sweden
+46 8 665 4527 (Phone)
+46 8 665 4599 (Fax)

University of Agder ( email )

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Norway

Knut Wicksell Center for Financial Studies, Lund University ( email )

P.O.Box 7080
S-220 07 Lund
Sweden
+46462228744 (Phone)

Clas Wihlborg

Chapman University ( email )

333 N. Glassell
Orange, CA 92866
United States
+17147447630 (Phone)

University West ( email )

Trollhättan, 46186
Sweden

Jianhua Zhang

University of Gothenburg - School of Business, Economics and Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden
+46-(0)31-7732689 (Phone)
+46-(0)31-7734154 (Fax)

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