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Macroeconomic Fluctuations as Sources of Luck in CEO Compensation

Chui, Hsin-Hui; Oxelheim, Lars LU ; Wihlborg, Clas and Zhang, Jianhua (2014) In Journal of Business Ethics
Abstract
Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed... (More)
Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed agency role. The policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for. (Less)
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author
organization
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type
Contribution to journal
publication status
published
subject
in
Journal of Business Ethics
publisher
Springer
external identifiers
  • scopus:84977073994
ISSN
1573-0697
DOI
10.1007/s10551-014-2520-1
language
English
LU publication?
yes
id
e22268ba-117d-4acb-829e-173f88a3cc36 (old id 4882932)
date added to LUP
2014-12-22 10:03:47
date last changed
2017-04-11 13:26:56
@article{e22268ba-117d-4acb-829e-173f88a3cc36,
  abstract     = {Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed agency role. The policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for.},
  author       = {Chui, Hsin-Hui and Oxelheim, Lars and Wihlborg, Clas and Zhang, Jianhua},
  issn         = {1573-0697},
  language     = {eng},
  month        = {12},
  publisher    = {Springer},
  series       = {Journal of Business Ethics},
  title        = {Macroeconomic Fluctuations as Sources of Luck in CEO Compensation},
  url          = {http://dx.doi.org/10.1007/s10551-014-2520-1},
  year         = {2014},
}