Executive Compensation (The role of largest owners and board of directors) - Licentiate Thesis

The substantial differences in the extent and mix of executive compensation plans and the lack of a strong pay-performance relation have been the subject of debate among researchers. In parallel with academic interest, the constant discussion among practitioners, regulatory bodies and the coverage of the media shed light upon the significant impact of executive compensation plans on social and economic matters in different settings and different periods of time. In particular, economic researchers argue that the information asymmetry among managers, boards and owners create a demand for different monitoring mechanisms in order to mitigate agency cost. However, there is relatively little research on how various governance structures would complement or substitute each other. The current investigation concerns how greater direct monitoring in the form of either ownership structure or board structure is associated with lower performance-based compensation for executives to be used as an alternative monitoring mechanism. The empirical investigation of this study builds on a Swedish sample of hand-collected data used to examine the agency relation between ownership structure, board structure and executive compensation. Importantly, the agency cost among large shareholders with respect to small shareholders has been less considered in compensation research. This is particularly the case in firms with a large divergence between voting rights and cash-flow rights which is common in many settings outside the US. Studying a sample of publicly listed firms, in Sweden, provides a unique opportunity to examine publicly available data in firms with alternative ownership structure. Consistent with agency theory the preliminary findings of this study support the significant role of control and monitoring in executive compensation. More precisely, following earlier research this study shows that in firms with a concentrated ownership structure there is less CEO compensation. However, more interesting results provide evidence for firms having Differentiated Voting Rights (DVR). The findings hint at higher CEO compensation in firms with a larger gap between voting rights and cash-flow rights of the largest owner. In assessing the role of the board of directors in CEO compensation, this study has considered the monitoring ability and diversity of the board. Importantly, diversity in the board, in terms of employee representatives’ presence, is found to have important implications for executive compensation. Finally, this research contributes to the theoretical and empirical literature on corporate governance and compensation by examining how a wide array of agency relations within different parties (involving family CEOs, professional managers, boards of directors, large shareholders and small shareholders) differentially affect extent and mix of CEO pay.