CEO Compensation and Company Performance - Evidence From Sweden

Abstract

Compensation to CEOs has increased dramatically over the past decades. This increase over time raises the question of its justifiability. The direct costs of CEO compensation shall be considered in light of the value added by reduced agency costs that originate from the principal agent relationship between CEOs and shareholders. This thesis examines the determinants of CEO compensation, focusing mainly on company performance. The study is conducted on 40 Swedish large and mid cap firms, and finally concludes that performance is significant and can partly explain CEO compensation with ROE and EPS as performance proxies. These results largely support earlier research on the topic that has been done on other time periods and regions. In addition to performance, the results of the thesis show that there are other important determinants of compensation, such as firm size and CEO related characteristics. Ultimately and evidently, several factors are of importance in understanding how CEO compensation is set on the Swedish market.