CEO compensation and risk-taking: Finnish evidence

Abstract

CEO compensation should ensure that the company can hire the best CEO for the company while considering the company´s size and ability to pay salary. Additionally, CEO compensation is a tool for the owners to control the CEO´s interests. This means that a specific part of the salary is paid only if agreed financial or other targets are met or exceeded. This thesis investigates whether CEO compensation increases risk-taking in the Finnish stock market. Stock volatility and beta-coefficient act as measures of risk. Volatility represents the total risk of the company while beta is a measure of the systematic risk. According to the agency theory, the CEO is working for the owners but there might be a conflict of interests. To ensure that the hired CEO makes the best day-to-day decisions on behalf of the owners, the compensation contract should encourage the CEO to do so. Therefore, at least part of the CEO compensation should be tied to the company's short- and long-term performance. This will ensure that the CEO works in the owners' best interest. However, previous literature has found that CEO compensation might harm the company in some cases. To study the issue, this thesis uses the Finnish stock market-listed companies´ annual reviews and remuneration reports from 2015-2021 as a source for the compensation data. The data has been divided into four categories: base salary, short-term incentives, long-term incentives, and other compensation. Additionally, this thesis uses company-specific variables such as company size, profitability, R&D investments and leverage as control variables. The results of this thesis suggest that volatility does not correlate with compensation components. When analyzing the beta coefficient the results suggest that base salary is positively correlated with the beta, which indicates that base salary seems to increase the company's systematic risk.