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Cronyism and the Determinants of Chairman Compensation

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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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Notes

  1. The NASDAQ OMX Stockholm is the primary securities exchange of the Nordic countries and is a subsidiary of the NASDAQ OMX group.

  2. The Nordic Growth Market (NGM) is a Swedish exchange for Nordic growth companies.

  3. Index of the 30 most actively traded stocks on the NASDAQ OMX exchange.

  4. Following a stricter statistical formulation, we are testing the null hypothesis of no relationship.

  5. AstraZeneca (domiciled in the UK), ABB (domiciled in Switzerland), Modern Times Group (domiciled in the UK).

  6. Compound Annual Growth Rate = (2009 Mean/2005 Mean) ^ (1/5) − 1.

  7. Firms listed on the Nasdaq OMX Stockholm are classified according to the following industry categories: Industrials, Health, Materials, Consumer-Discretionary, Consumer-Staples, Information Technology, Financials, Energy, and Telecommunications.

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Acknowledgments

Financial support from NASDAQOMX Nordic Foundation is gratefully acknowledged.

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Authors and Affiliations

  1. Lund University, Lund, Sweden

    Lars Oxelheim & Kevin Clarkson

  2. Research Institute of Industrial Economics, Stockholm, Sweden

    Lars Oxelheim

  3. University of Agder, Kristiansand, Norway

    Lars Oxelheim

Authors
  1. Lars Oxelheim
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  2. Kevin Clarkson
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Correspondence to Lars Oxelheim.

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Oxelheim, L., Clarkson, K. Cronyism and the Determinants of Chairman Compensation. J Bus Ethics 131, 69–87 (2015). https://doi.org/10.1007/s10551-014-2260-2

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  • DOI: https://doi.org/10.1007/s10551-014-2260-2

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