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

Author

Listed:
  • Oxelheim, Lars

    (Research Institute of Industrial Economics (IFN))

  • Wihlborg, Clas

    (Chapman University)

  • Zhang, Jianhua

    (Göteborg University)

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.

Suggested Citation

  • Oxelheim, Lars & Wihlborg, Clas & Zhang, Jianhua, 2010. "How to Avoid Compensating CEO for Luck: The Case of Microeconomic Fluctuations," Working Paper Series 842, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0842
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    Cited by:

    1. Oxelheim, Lars, 2019. "Optimal vs satisfactory transparency: The impact of global macroeconomic fluctuations on corporate competitiveness," International Business Review, Elsevier, vol. 28(1), pages 190-206.

    More about this item

    Keywords

    Executive compensation; Salary; Bonus; Option; Pension; Macroeconomic uncertainty; Macroeconomic factors; Performance; Luck;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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