It takes two to tango: The relationship between pay-performance sensitivity and remuneration committees

Abstract: A central feature in modern economics is the separation of ownership and control, leading to the use of corporate governance in business management. Regulatory environment emphasizes the use of remuneration committees as a corporate governance measure to incentivize compensation policies and monitor executive compensation. Using a sample of the largest Swedish publicly listed firms, this thesis develops a simple model for; (1) determining the sensitivity between executive pay and firm performance defined as shareholder return, (2) determining the influence on the pay-performance sensitivity by paying the remuneration committee member. Firstly, the model indicates a positive relationship between executive compensation and firm performance. Secondly, we find that if a company incorporates a fee to the remuneration committee the executive compensation is increasingly dependent on the level of firm performance. The results further indicate that the underlying pay-performance sensitivity identified in (1) is driven by the firms with paid remuneration committee members. The model is of simple characteristics and acknowledged to be limited in a more general practice.