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Do CEOs Get Paid for Performance?

Andersson, Jonas and Andersson, Christian (2006)
Department of Business Administration
Abstract
Agency theory describes the conflict of interest between the principal (stockholders) and the agent (CEO). Aligning the incentives of executives with those of the owners is the most direct way to mitigate the agency problem. If there is no meaningful link between CEO compensation and company performance, it is doubtful that the large sums of assets in public corporations are being managed efficiently. In theory the solution is simple reward the CEO when shareholders wealth increases. The purpose of this paper is to investigate if there is a relationship between company performance and CEO compensation among Swedish companies, in materials and information technology industry. Also investigate if bonus programs to managers have a positive... (More)
Agency theory describes the conflict of interest between the principal (stockholders) and the agent (CEO). Aligning the incentives of executives with those of the owners is the most direct way to mitigate the agency problem. If there is no meaningful link between CEO compensation and company performance, it is doubtful that the large sums of assets in public corporations are being managed efficiently. In theory the solution is simple reward the CEO when shareholders wealth increases. The purpose of this paper is to investigate if there is a relationship between company performance and CEO compensation among Swedish companies, in materials and information technology industry. Also investigate if bonus programs to managers have a positive influence on company performance and therefore are in the best interest of the shareholders. To be able to contribute with an objective view of the compensation phenomenon to Swedish CEOs.
After having done a number of regressions we can say that we know to about 50 % what variables that explain total compensation for a CEO. However as the purpose of this study was to try and find a relationship between CEO compensation and company performance. We then draw the conclusion that if we have some variables that explain total compensation rather well those variables should also to some degree explain company performance, if a relationship between them should exist. After having run regressions with both ROE and return on stock as measurement for company performance and only ending up with models that explains about 2 % and 6 % of company performance, we then draw the conclusion that there do not exist any strong relationship between company performance and CEO compensation. Therefore all bonuses paid out to CEOs as an incentive to perform better are just a way to expropriate wealth from the shareholders, if there is no relationship between bonuses and company performance, then bonuses to CEOs are not in the shareholders best interest. (Less)
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author
Andersson, Jonas and Andersson, Christian
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
CEO Compensation, Company Performance, Incentive Contracts, Bonuses, Management of enterprises, Företagsledning, management
language
Swedish
id
1341526
date added to LUP
2006-06-05
date last changed
2012-04-02 16:33:10
@misc{1341526,
  abstract     = {Agency theory describes the conflict of interest between the principal (stockholders) and the agent (CEO). Aligning the incentives of executives with those of the owners is the most direct way to mitigate the agency problem. If there is no meaningful link between CEO compensation and company performance, it is doubtful that the large sums of assets in public corporations are being managed efficiently. In theory the solution is simple reward the CEO when shareholders wealth increases. The purpose of this paper is to investigate if there is a relationship between company performance and CEO compensation among Swedish companies, in materials and information technology industry. Also investigate if bonus programs to managers have a positive influence on company performance and therefore are in the best interest of the shareholders. To be able to contribute with an objective view of the compensation phenomenon to Swedish CEOs.
After having done a number of regressions we can say that we know to about 50 % what variables that explain total compensation for a CEO. However as the purpose of this study was to try and find a relationship between CEO compensation and company performance. We then draw the conclusion that if we have some variables that explain total compensation rather well those variables should also to some degree explain company performance, if a relationship between them should exist. After having run regressions with both ROE and return on stock as measurement for company performance and only ending up with models that explains about 2 % and 6 % of company performance, we then draw the conclusion that there do not exist any strong relationship between company performance and CEO compensation. Therefore all bonuses paid out to CEOs as an incentive to perform better are just a way to expropriate wealth from the shareholders, if there is no relationship between bonuses and company performance, then bonuses to CEOs are not in the shareholders best interest.},
  author       = {Andersson, Jonas and Andersson, Christian},
  keyword      = {CEO Compensation,Company Performance,Incentive Contracts,Bonuses,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {Do CEOs Get Paid for Performance?},
  year         = {2006},
}