Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 746: Executive Compensation and Macroeconomic Fluctuations

Lars Oxelheim (), Clas Wihlborg and Jianhoa Zhang
Additional contact information
Lars Oxelheim: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Clas Wihlborg: Chapman University and Copenhagen Business School
Jianhoa Zhang: University of Göteborg

Abstract: Macroeconomic fluctuations affect corporations’ performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001–2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs’ compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone.

Keywords: Executive Compensation; Macroeconomic Factors; Cash Compensation

JEL-codes: L14; L16; M14; M21; M52

37 pages, April 21, 2008

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