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Executive compensation: Governing the CEO or paying the price

Trial lecture. Executive compensation: Governing the CEO or paying the price. Sven-Olof Collin. CORPORATE GOVERNANCE. Exogenous Forces, i.e., Environment Legislation, culture, regulation, mass media etc. Corporate Governance Mechanisms: Capital Managerial labour Executive compensation

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Executive compensation: Governing the CEO or paying the price

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  1. Trial lecture Executive compensation: Governing the CEO or paying the price Sven-Olof Collin

  2. CORPORATE GOVERNANCE Exogenous Forces, i.e., Environment Legislation, culture, regulation, mass media etc Corporate Governance Mechanisms: Capital Managerial labour Executive compensation Board Auditors Strategy & Structure Product market Part of the Environment Owner/ Principal of the Corporation Corporate Entrepreneurship Performance effectiveness

  3. EXECUTIVE COMPENSATION • High salaries • Bonus • Option schemes

  4. THE COMPENSATION PUZZLE 40% Size of the firm Executive Pay Performance of the firm 5%

  5. COMPENSATION PUBLICITY Börje Ekholm (Investor): Profit sharing (terminal payment): 111.000.000SKr Keith McLoughlin (Electrolux): First year salary: 74.500.000Skr Percy Barnevik (ABB): Terminal payment: 901.000.000SKr, repay: 548.000.000SKr, in pocket: 353.000.000SKr Foppa (Ice hockey): 105.000.000SKr Zlatan (Soccer): 81.000.000Skr

  6. EFFICIENT INCENTIVES • Problem of governance: Align shareholder interest and CEO interest • Goal: Maximize shareholder value • Influence behavior of CEO through incentives: Correlation pay – share value => Payment in shares or options (right to buy a share at a predetermined price) Termed: “Strong efficient incentives”

  7. INCENTIVES CORRELATION PAY - PERFORMANCE • Piece work payment (potato harvest) • Induce a kid to clean the room My effort is only a function of my compensation

  8. CRITERIA FOR COMPENSATION • Performance • Behaviour • Individual characteristics • Labour market price • Position • Peer comparison

  9. salary CEO COMPENSATION – AN IMPORTANT PART OF THE ORGANIZATIONS INCENTIVE SYSTEM Winnings SKr productivity Bets year

  10. Options are a CEOs best friend • Family ownership reduce level of CEO compensation • Ownership concentration reduce propensity to use options • Conclusion: CEOs should pick firms with international investors and dispersed ownership = High wage and options

  11. SELECTION SYSTEM • Selection of managers • Skills • Norms • Survival of those that do not need incentives every second • Survival of those with good norms, i.e., relvant duty

  12. SANCTION SYSTEM • Inclusion & exclusion: Belongingness • Cost of exit: The golden prison

  13. WHEN DO WE NEED THE STIMULUS OF INCENTIVES Following wind, flat rod Muddy road, adverse wind

  14. CASH FLOW - PAY GOOD TIMES BAD TIMES • WHEN CAN YOU AFFORD BIG SALARIES? • WHEN DO YOU NEED BIG SALARIES?

  15. PAY – PERFORMANCE? Pay when you have money Promise (i.e., option) when you do not have money

  16. CONCLUSION • CEOs are not 5 years old kids • Compensation function of … performance, market price, golden prison etc • Compensation part of organizational incentives • Individuals act because they have to act • Compensation in accordance with traditions • Compensation a function of cash flow

  17. POWER?

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