Agency conflicts, executive compensation regulations and CEO pay-performance sensitivity: evidence from Sweden

Abstract

Based on a unique country set up with concentrated ownership of firms, strong representation of major shareholders on boards and one of the highest percentages of firms with dual-class shares worldwide I study CEO pay-performance sensitivity in Swedish listed firms in the years 2001-2013. Focusing on Type II agency conflict, I find that that pay-performance sensitivity in family-controlled firms with family CEOs is significantly lower than in other types of firms, and that dual-class firms have significantly lower sensitivity of pay to accounting performance than non-dual-class firms. The results suggest that in firms with type II agency conflicts compensation practices may be driven either by family ties or by the power preferences of the controlling shareholder that uses compensation to align CEO's interest with his/her will rather than with financial performance. The study also documents that the link between CEO pay and performance disappears in the 2010-2013 period following the implementation of the European Recommendations regarding executive compensation. This finding is in contrast to the stipulated goal of the European Commission, 'to ensure pay for performance' (European Commission 2009).

Does nepotism run in the family? CEO pay and pay‐performance sensitivity in Indian family firms

“…The P–P lens suggests that controlling families of business groups (Chang, 2003; Morck et al, 2005) may exploit minority shareholders. Our robust results that compared to their professional counterparts, family CEOs experience higher pay which is unaffected by poor firm performance and is disproportionately boosted by superior firm performance, is consistent with the P–P lens and is the opposite of prior findings on CEO compensation in family firms in mature economies like the United States (Gómez‐Mejía et al, 2003) or Sweden (Cieślak, 2018).…”

It's a family affair: How social identification influences family CEO compensation

“…Other studies, albeit in different contexts, have identified a nonsignificant effect (Combs et al, 2010) or even a positive effect (Barontini & Bozzi, 2018; Gallego & Larrain, 2012) of family ownership on CEO compensation. Some research has suggested that CEOs of family firms who are also members of the family receive lower compensation than those who are externally hired professionals (Barontini & Bozzi, 2018; Block, 2011; Cieślak, 2018; Gomez‐Mejia et al, 2003; Michiels et al, 2013; Young & Tsai, 2008). However, Combs et al (2010) showed that this effect only held if the CEO was a family member serving in a firm together with other family representatives.…”

“…Most studies of executive compensation in family firms have relied on market‐based theories, such as agency theory and the notion of optimal contracting (Barontini & Bozzi, 2018; Cheung & Chan, 2004; Cieślak, 2018; Combs et al, 2010; Croci et al, 2012; De Cesari et al, 2016; Gomez‐Mejia et al, 2003; Jaskiewicz et al, 2017; Michiels et al, 2013). For example, Combs et al (2010) suggested that in family firms, members of the family exercise strategic control over CEOs' actions, thereby alleviating the agency problem between owners and CEOs and reducing the likelihood of rent expropriation by family CEOs.…”

“…CEO compensation is an important topic of research on family firms because it provides insights into the incentives and behaviors of individual CEOs, who act as the key decision‐makers in family firms (Cannella et al, 2015; Combs et al, 2010). Studies in this area have revealed differences in compensation between family and non‐family firms (e.g., Croci et al, 2012; De Cesari et al, 2016) and between family and non‐family executives in family firms (e.g., Barontini & Bozzi, 2018; Block, 2011; Cieślak, 2018; Gomez‐Mejia et al, 2003; Michiels et al, 2013).…”

The nexus between effective corporate monitoring and CEO compensation

“…Institutional investors and external blockholders also have power and ability to monitor managerial decisions related to strategic decisions of organisation including CEO compensation (Shin-Ping and Hui-Ju, 2011). Similarly, Cieślak (2018) observed that if the firm ownership is concentrated among family members, it is less likely that CEOs are paid excessive compensation. Hence, the present study also argues that effective corporate monitoring (internal and external) are helpful in better governing and controlling the opportunistic behaviour of top management which might influence the level of CEO compensation extracted on the cost of shareholders' wealth maximisation principle.…”