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Executive Compensation and Macroeconomic Fluctuations

Author

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  • Oxelheim, Lars

    (Research Institute of Industrial Economics (IFN))

  • Wihlborg, Clas

    (Chapman University and Copenhagen Business School)

  • Zhang, Jianhoa

    (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.

Suggested Citation

  • Oxelheim, Lars & Wihlborg, Clas & Zhang, Jianhoa, 2008. "Executive Compensation and Macroeconomic Fluctuations," Working Paper Series 746, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0746
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    References listed on IDEAS

    as
    1. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
    2. Lars Oxelheim & Clas Wihlborg, 2003. "Recognizing Macroeconomic Fluctuations In Value Based Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(4), pages 104-110, September.
    3. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
    4. Ciscel, David H & Carroll, Thomas M, 1980. "The Determinants of Executive Salaries: An Econometric Survey," The Review of Economics and Statistics, MIT Press, vol. 62(1), pages 7-13, February.
    5. Lucian Bebchuk, 2005. "The Growth of Executive Pay," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(2), pages 283-303, Summer.
    6. Kevin J. Murphy, 1986. "Incentives, Learning, and Compensation: A Theoretical and Empirical Investigation of Managerial Labor Contracts," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 59-76, Spring.
    7. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    8. John M. Abowd, 1990. "Does Performance-Based Managerial Compensation Affect Corporate Performance?," ILR Review, Cornell University, ILR School, vol. 43(3), pages 52, April.
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    Cited by:

    1. Dah, Mustafa A., 2016. "Governance and firm value: The effect of a recession," Research in International Business and Finance, Elsevier, vol. 37(C), pages 464-476.

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    More about this item

    Keywords

    Executive Compensation; Macroeconomic Factors; Cash Compensation;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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