Discussion

The previous empirical researches we have presented above, give us insight about the

relationship between firm performance and CEO compensation, and if the assumptions of the theories are met in practice. Most of the studies either find a significant, but a weak positive relationship between firm performance and CEO compensation, or a non-existing

relationship. Hence, we expect to get similar results as the previous empirical researches on this relationship, but we want to include other variables to see what kind of implications and possibilities this can have for our study.

Most of the studies find a significant, but a weak positive relationship between firm

performance and CEO compensation (Gomez-Mejia et al., 1987; Haukdal et al., 1997; Jensen

& Murphy, 1990a, 1990b; Lewellen & Huntsman, 1970; Randøy & Nielsen, 2002; Randøy &

Skalpe, 2007; Sigler, 2011; Tosi et al., 2000). The exception is the study by Firth et al. (1996) that find no significant relationship. Olsen and Klungreseth (2013) find no significant

relationship, but rather a negative significant relationship between CEO compensation in a current year and some measures of firm performance in the same year. However, they find a positive and significant relationship between the previous years’ Jensen’s alpha and the current year’s variable CEO compensation

CEO compensation is mainly measured as CEO salary, bonus and long-term incentives such as stock options in the American studies (Gomez-Mejia et al., 1987; Jensen & Murphy, 1990a, 1990b). Additionally, Jensen and Murphy (1990a) include stock ownership and Gomez-Mejia et al. (1987) also include profit sharing and pension funds. The Norwegian studies, define CEO compensation as fixed salary and variable CEO compensation, as it is presented in the annual reports (Haukdal et al., 1997; Olsen & Klungreseth, 2013; Randøy &

Skalpe, 2007).

Further, the studies mainly focus on the change in firm performance and its impact on change in CEO compensation. Firm performance is measured as shareholder wealth and market value, which is stock price of a firm and dividend payments (Jensen & Murphy, 1990a, 1990b). Additionally, Gomez-Mejia et al. (1987) include changes in scale, profits, ROE and EPS, since it is not enough to just look at shareholder wealth. Haukdal et al. (1997) examine changes in market returns, sales, as well as ROA. ROA is also used as a measure for firm performance with P/B and shareholder return in the study by Randøy and Skalpe (2007) for firms listed on the Oslo Stock Exchange.

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The Norwegian study by Haukdal et al. (1997), find no significant relationship between marked-based measures of performance and CEO compensation, but a significant and positive relationship based on accounting measures, as ROA, and sales (Haukdal et al., 1997). On the other hand, Randøy and Skalpe (2007) find that only the market-based measure, P/B, has a significant positive impact on CEO compensation in firms listed on the Oslo Stock Exchange.

As we mentioned, Olsen and Klungreseth (2013), finds no significant positive pay-for-performance relationship, but however find a weak and positive significant relationship between the previous year’s Jensen’s alpha and the current years CEO compensation.

The studies find that there are other variables that affect the pay-for-performance relationship.

All of the studies, except from Jensen and Murphy (1990a), examine firm size’s effect on the relationship between firm performance and CEO compensation, but they measure the variable differently. Gomez-Mejia et al. (1987) measure firm size as annual sales and profits in dollars.

Haukdal et al. (1997) include market value, in addition to sales.

Results show that there is a greater pay-for-performance relationship in smaller firms, rather than in larger firms (Gomez-Mejia et al., 1987; Haukdal et al., 1997; Jensen & Murphy, 1990b). Olsen and Klungreseth (2013) measure firm size as the market value of a firm, and Randøy and Skalpe (2007) use number of employees in addition to market value to measure firm size. Randøy and Skalpe (2007) examine firm size as a determinant of both level and change in CEO compensation and its effect on the pay-for-performance relationship. Olsen and Klungreseth (2013) also examine firm size’s effect on both CEO compensation level and the pay-for-performance relationship. They both find that CEO compensation is higher in large firms, which results in a weaker pay-for-performance relationship.

Gomez-Mejia et al. (1987), and Jensen and Murphy (1990a, 1990b) find that CEO’s direct ownership has a major effect on the pay-for-performance relationship. Their findings show that the pay-for-performance relationship is greater in owner-controlled firms, than in

manager-controlled firms. Further, when CEOs are dependent on firm performance, they will be willing to increase firm performance to increase their own compensation. Randøy and Skalpe (2007) show that the firms’ localizations and the CEO’s age have significant effects on CEO compensation, but that the length of the CEO’s tenure and if the firms are publicly owned, have a negative influence on CEO compensation. Jensen and Murphy (1990a, 1990b) include the managers risk aversion and the firm’s risk in their analyses, but they do not find

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any significant effects. Haukdal et al. (1997) include firm risk to see its effects on pay-for-performance relationship, but they are neither able to find any significant results.

So far, we have examined different previous empirical researches based on the presented theories in Chapter 2, and additionally discussed their similarities and differences. The studies have shown different results based on which variables they have included in their analyzes.

We have seen the importance of the pay-for-performance relationship from the theoretical framework, but few studies have found a strong and positive significant relationship between these two variables. Hence, we also expect to find similar results. This is inconsistent with the classical principal-agent theory, but empirical studies have shown that there are other

variables that can strengthen or weaken this relationship, and hence that there are other determinants of CEO compensation. This leads us to divide our study in two, where we first examine the pay-for-performance relationship, and second examine determinants of CEO compensation. This will be our contribution to the literature of CEO compensation.

Based on the theoretical framework, and findings from previous empirical research, we will thereby examine if there is a positive pay-for-performance relationship, and then how CEO compensation is determined. Hence, we present the following research question:

“Is there a positive relationship between firm performance and CEO compensation in firms listed on the Oslo Stock Exchange, or are there other determinants of CEO

compensation?”

In order to answer this research question, we need to consider both market- and accounting based measures of firm performance. For instance, previous empirical studies show that firm performance cannot be measured only by shareholder wealth, and their findings show that both market-based and accounting based measures of firm performance have a significant effect on the variable CEO compensation. It is therefore important to measure firm performance by several variables.

We want to include and examine the market-based measures; P/B, P/E, Jensen’s alpha and Tobin’s Q, and the accounting-based measures; ROE, ROA and EVA™, to see their impact on CEO compensation. We choose these measures of firm performance as previous studies find significant relationships between P/B, Jensen’s alpha, ROA, and ROE, and CEO compensation for listed firms (Haukdal et al., 1997; Olsen & Klungreseth, 2013; Randøy &

Skalpe, 2007; Sigler, 2011). P/E and EVA™ do not show any positive significant effect on

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CEO compensation, but we choose to include these measures to see if we achieve different results based on our data. We will also include Tobin’s Q as the presented previous studies have not included this variable. The reason we want to include Tobin’s Q as a measurement for firm performance, is because firm performance based on market value is more relevant for CEO compensation in listed firms. Precisely, Tobin’s Q show the relationship between a firm’s market and book values (White, Sondhi, & Fried, 2003). We will define and discuss these measures, in addition to their relationships with CEO compensation, in the next chapter In order to answer our secondary research question; “or are there other determinants of CEO compensation”, we will further include control variables that are shown to affect the pay-for-performance relationship, and are shown to be determinants of CEO compensation. These are firm size, firm risk, CEOs’ age, gender, and tenure, the firm’s ownership structure, the size of the board of directors and the gender balance of the board of directors. Additionally, we will examine variables that are not been examined in the presented studies. We choose to include CEO change as a control variable for the-pay-for-performance relationship, and how the firms are owned, either publicly or privately, in order to see their effects on both the

pay-for-performance relationship and CEO compensation. We will present our research models and hypotheses in the next chapter, based on the theoretical framework and discussions from the previous empirical researches.

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