Cronyism and the Determinants of Chairman Compensation

Lars Oxelheim; Kevin Clarkson

doi:10.1007/s10551-014-2260-2

Cronyism and the Determinants of Chairman Compensation

Lars Oxelheim, Kevin Clarkson

Department of Business Administration

Research output: Contribution to journal › Article › peer-review

Abstract

This study examines determinants of chairman compensation in a supervisory board setting and, specifically, the relationship between chairman and CEO compensation. Using a sample of publicly listed firms in Sweden, the study indicates that chairman compensation—
despite its fixed nature—is reflective of firm performance via a positive relationship to CEO compensation. As CEO compensation is set before chairman compensation, we argue that the chairman may be inclined to conspire with the CEO in earnings management efforts at the expense of monitoring on behalf of investors. Supporting our cronyism argument, we find evidence that the gap between chairman
and CEO compensation is less at firms where the chairman had previously served in the executive management team. The close ties between the chairman and CEO compensation add to the understanding of the relative success of the managerial power theory versus the agency theory in explaining CEO compensation.

Original language	English
Pages (from-to)	69-87
Journal	Journal of Business Ethics
Volume	131
Issue number	1
DOIs	https://doi.org/10.1007/s10551-014-2260-2
Publication status	Published - 2015

Subject classification (UKÄ)

Business Administration

Free keywords

Chairman compensation
CEO compensation
Cronyism
Pay-for-performance
Ownership structure
Supervisory board

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10.1007/s10551-014-2260-2

http://link.springer.com/article/10.1007%2Fs10551-014-2260-2#

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title = "Cronyism and the Determinants of Chairman Compensation",

abstract = "This study examines determinants of chairman compensation in a supervisory board setting and, specifically, the relationship between chairman and CEO compensation. Using a sample of publicly listed firms in Sweden, the study indicates that chairman compensation— despite its fixed nature—is reflective of firm performance via a positive relationship to CEO compensation. As CEO compensation is set before chairman compensation, we argue that the chairman may be inclined to conspire with the CEO in earnings management efforts at the expense of monitoring on behalf of investors. Supporting our cronyism argument, we find evidence that the gap between chairman and CEO compensation is less at firms where the chairman had previously served in the executive management team. The close ties between the chairman and CEO compensation add to the understanding of the relative success of the managerial power theory versus the agency theory in explaining CEO compensation.",

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AB - This study examines determinants of chairman compensation in a supervisory board setting and, specifically, the relationship between chairman and CEO compensation. Using a sample of publicly listed firms in Sweden, the study indicates that chairman compensation— despite its fixed nature—is reflective of firm performance via a positive relationship to CEO compensation. As CEO compensation is set before chairman compensation, we argue that the chairman may be inclined to conspire with the CEO in earnings management efforts at the expense of monitoring on behalf of investors. Supporting our cronyism argument, we find evidence that the gap between chairman and CEO compensation is less at firms where the chairman had previously served in the executive management team. The close ties between the chairman and CEO compensation add to the understanding of the relative success of the managerial power theory versus the agency theory in explaining CEO compensation.

KW - Chairman compensation

KW - CEO compensation

KW - Cronyism

KW - Pay-for-performance

KW - Ownership structure

KW - Supervisory board

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DO - 10.1007/s10551-014-2260-2

M3 - Article

SN - 1573-0697

VL - 131

SP - 69

EP - 87

JO - Journal of Business Ethics

JF - Journal of Business Ethics

IS - 1

ER -

Cronyism and the Determinants of Chairman Compensation

Abstract

Subject classification (UKÄ)

Free keywords

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