The effectiveness of CEO incentive systems in Swedish Corporate Governance. What is the firm value added by CEO option ownership?

Abstract: This study aims to contribute to a better understanding of the effectiveness of equity-based compensation as an incentive-creating mechanism for interest alignment of shareholders and CEOs in public Swedish companies. Exclusive access to comprehensive data on the complete set of different components included in total CEO compensation contracts between 1999 and 2005 provides new opportunities to look into the true relationships between the generation of CEO wealth and shareholder wealth. First, we examine whether CEOs are actually rewarded for better performance. We find that a 10 percent increase in firm performance increases the share of CEO option value relative fixed salary by 5.4 percentage points. Second, we seek to reveal to what extent any eventually prevailing responsiveness of firm performance to CEO compensation is driven by equity-based incentives. We see that firm return declines by less than 0.2 percent per 10 percent increase in current CEO shareholding value. We conclude that no evident relation can be found between CEO ownership of options and performance in terms of firm return. Following our research, we emphasize the need for improved availability to company information, in order to enable extended research on this topic. There through, new tools for value enhancement in public companies may be provided, which in a wider perspective would favour socioeconomic utility and common wealth.