Executive Compensation, CPS and Firm Performance

Abstract

The purpose of the study is to research the relation between executive compensation and firm performance, as well as the significance of equal pay within the executive team. As well as total CEO compensation, the paper uses a measure known as CEO Pay Slice, which is the fraction of compensation that the CEO receives out of total pay to other executives.

Executive compensation and firm performance is widely studied, but there is little research employing data from the Nordic countries. Previous studies have examined CPS either on data from the U.S. or the UK. This study uses data from Finnish listed firms to research the effectiveness of executive compensation strategies, and examine the compensation culture in Finland and Nordic countries. The data set consist of all non-financial firms listed in the OMX Helsinki stock exchange from 2010 to 2017.

The main performance measures in the regressions are industry-adjusted Tobin’s Q for firm value, and industry-adjusted ROA for accounting profitability. Main findings are that CEO compensation has a significant positive association with future firm value. This suggests that Finnish CEOs are able to increase firm value in accordance with their compensation level. The correlation with accounting profitability is positive but not significant. Compensation differences within executives seem to have no effect on firm value or accounting profitability. These findings provide useful reference for future research on executive compensation, particularly on the Nordic countries.