PERFORMANCE AND REMUNERATION : A study of the pay-performance relation in Scandinavia

Abstract: The size of the remuneration paid to CEOs is a continuously debated area in society. In times of inflation, where the real wages are decreasing at the same time as the remuneration to CEOs are increasing, the phenomenon becomes more relevant. Is the remuneration paid to CEOs at a reasonable level? Are they getting paid in accordance with the performance of the company they manage? The purpose of this study is to see if there is a pay-performance relation in the most traded companies in Scandinavia. To fulfill the purpose, analyses were performed to test the relationship between CEOs remuneration and the financial performance of the firm they manage for the years 2018 to 2021. The sample consists of 71 companies that are listed on one of the indexes OMXS30, OMXC25 and OBX in Scandinavia. 28 out of the companies are Swedish, 23 Danish and 20 are Norwegian. Both the total and variable CEO remuneration in the companies were manually gathered from remuneration and annual reports and then tested against the financial performance measures Return on Assets and Total Investment Return. As the CEO is in an agency position where the shareholders work as the principals, an agency problem is present. To reduce the agency problem, incentives for the CEO to work in the shareholders’ best interest are important. One way of doing that is to design the CEOs remuneration package so it has a relation to the performance of the company. Originating from the Agency Theory, the Managerial Power and the Optimal Contracting theories try to explain the way these packages are designed. The Optimal Contracting theory explain that the design is to align the participants interest in order to maximize both parties’ outcomes, while the Managerial Power theory is explained as top executives possesses substantial power in the company, it enables them to extract higher remuneration than what is optimal for the shareholders. The empirical result showed a significant positive relationship between variable remuneration and both performance measures along with total remuneration and Total Invest Return. A positive relationship was found between total remuneration and Return on Assets, but not statistically significant. Based on the results a conclusion can be drawn that there is a pay-performance relation in companies listed on the main indexes in Scandinavia, and that the Optimal Contracting theory better explain the way remuneration packages are designed.