Orders of Merit and CEO Compensation: Evidence from a Natural Experiment

Abstract

Governments worldwide bestow orders of merit upon their citizens as a recognition of distinguished service. In this paper, I study if orders of merit can function as an external form of perquisite through which the government can supplement the compensation given by a publicly listed firm to the CEO. I build upon the literature on perquisites to develop hypotheses on the relationship between orders of merit and executive compensation. 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-differences 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. This study provides empirical support that orders of merit can be seen as an external form of perquisite that can substitute for monetary compensation. Essentially, this is evidence that governments can affect CEO salaries through the provision of a nonmonetary status good. The findings also indicate that CEOs not only care about distinguishing themselves as “superstars” among their peer group of corporate leaders but also value nonmonetary symbols that emphasize their social status in relation to the general public.Companies should take into account that CEOs may receive valuable status goods from the government when determining compensation policies. In addition, governments should consider that the removal of nonmonetary awards may result in higher levels of monetary compensation in publicly listed firms.

Keywords: Executive compensation, positional good, order of merit

JEL Classification: G30, J33