CEO Compensation, Firm Size and Firm Performance: Evidence from Finnish Panel Data

This paper examines how CEO pay is related to firm size and to firm performance in Finland by using new individual-level compensation data in 1996-2002. We find robust evidence that CEO average compensation has increased substantially between 1996 and 2002. For example, the ratio between CEO and industrial worker mean total compensation was 7 in 1996, peaked at 24 in 2000, and thereafter dropped to 13 in 2002. We argue that the change in CEO compensation, and especially in total compensation, is highly related to changes in stock market measures of firm performance. Our shareholder wealth measure suggests that the salary and bonus change in CEO wealth is 6.84 per 1,000 change in shareholder wealth. Respectively, the total compensation change is 21.85 per 1,000 change in shareholder wealth. We find no evidence on the contemporaneous link between a change in CEO compensation and change in ROA% (Return on Assets). However, one-year lagged accounting and stock market based firm performance measures are associated with the change in CEO total compensation. In line with previous studies, our findings suggest that pay-for-firm size elasticity is close to 0.3. We also find interesting corporate governance findings. First, the share of foreign ownership is positively and statistically significantly associated with the level of compensation. Also, foreign ownership parameter estimates are about three times larger for total compensation than for salary and bonuses in most specifications. Second, ownership concentration, as measured by the voting share of a largest shareholder, is negatively related to the level of compensation, but only in the pooled model. Third, the size of the board is positively related to the level of compensation, especially to the level of base salary and bonus.