Macroeconomic Fluctuations as Sources of Luck in CEO Compensation


Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed agency role. The policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for.

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  1. 1.

    In Gabaix and Landier (2008), it is argued that the sixfold increase of CEO compensation in the US between 1980 and 2003 can be attributed to the sixfold increase of market capitalization of large companies during the same period. In a long time series analysis of CEO compensation, Frydman and Saks (2010) show that prior to 1970 s there was little dispersion across managers and low correlation between pay and firm size prior. After 1970s, incentive pay has grown significantly, correlation between pay and firm size has strengthened, and pay dispersion across executives has widened.

  2. 2.

    See, for example, Oxelheim and Randöy (2005).

  3. 3.

    The contracting literature indicates that optimal incentive contracts are achieved by means of some kind of benchmarking for “normal” performance and the linking of compensation to a performance measure reflecting skill and effort with as little noise as possible. Milgrom and Roberts (1992) and Rosen (1992) review the contracting literature on incentive effects of compensation schemes.

  4. 4.

    TOTAL_ALT1 substitutes for TDC1 except that stock and option awards are valued using the grant date fair value of the award instead of the amount charged to the income statement under FAS 123R. TOTAL_ALT2 substitutes for TDC2 except that stock and option awards are valued using the value realized from option exercise or stock vesting instead of the amount charged to the income statement under FAS 123R.

  5. 5.

    Changes in real US GDP relative to the previous year were included in the regressions below but removed since this variable did not add explanatory value. As noted in the text, it is desirable to be able to capture macroeconomic condition with price variables alone.

  6. 6.

    The sectors in Table 4 are the following with the number of firms in parenthesis: 1 = Oil and Gas (22); 2 = Food Tobacco Products (28); 3 = Paper and Paper Products (48); 4 = Chemical Products (64); 5 = Manufacturing (35); 6 = Computer Hardware & Software (66); 7 = Electronic equipment (35); 8 = Transportation (51); 9 = Scientific Instruments (38); 10 = Communications (10); 11 = Electric and Gas Services (58); 12 = Durable Goods (8); 13 = Retail (32); 14 = Eating and Drinking Establishments (20); 15 = Financial Services (38); 16 = Entertainment Services (4); 17 = Health (5); and 18 = All Others (72).

  7. 7.

    Oxelheim and Randöy (2005) find that this variable affects the exchange rate sensitivity of compensation in a group of small countries.

  8. 8.

    These results indicate that sales generally are higher than what value maximization would call for.

  9. 9.

    The effects of the lagged exchange rate levels are neglected since calculation of this effect requires an assumption about what the exchange rate would be under “neutral” macroeconomic conditions.


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Lars Oxelheim acknowledges financial support from NASDAQOMX Nordic Foundation. Jianhua Zhang acknowledges financial support from VINNOVA.

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Correspondence to Lars Oxelheim.

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Chiu, HH., Oxelheim, L., Wihlborg, C. et al. Macroeconomic Fluctuations as Sources of Luck in CEO Compensation. J Bus Ethics 136, 371–384 (2016).

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  • Macroeconomic fluctuations
  • Luck
  • Corporate performance
  • CEO compensation
  • Moral hazard
  • Managerial power