Randøy and Skalpe (2007)

Another Norwegian study on the pay-for-performance relationship and CEO compensation, is the study by Randøy and Skalpe (2007). This study is based on three theories; the principal-agent theory, the managerial power theory, and the human capital theory, and their analyzes include Norwegian data from 1998 to 2004 which is divided in two. In the first part of the study they examine around 10 000 firms that have information about CEO compensation, ownership structure, and turnover, and the second part of the study is based on data collected from 122 firms listed on the Oslo Stock Exchange.

The researchers have a quantitative research method and use both bivariate time series

analysis and cross sectional analysis to estimate the relations. They examine the determinants of CEO compensation level and change on the basis of these three theories, and examine how CEO compensation is determined by using factors as firm size measured by number of employees and market value, firm performance, ownership structure, characteristics of the board of directors, characteristics of the CEOs, if the firm is publicly owned, if the firm is listed on the Oslo Stock exchange, as well as the firm's localization and industry. The total CEO compensation is defined as fixed salary, pension funds, and variable compensation such as bonuses, stock options and dividend payments.

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The researchers assume that firm size matters most when it comes to determining CEO compensation. More risk averse CEOs are willing to reduce their risk by linking the risk to a more stable factor as firm size. As well as the firm size is less unquestionable and gives the CEO the possibility of demanding a higher compensation for scope of responsibility. From a more human capital view, a larger firm with more complexity requires CEOs with higher competences. This implies that there should be a positive relationship between firm size and CEO compensation.

Further, they assume that firm performance also has an impact on CEO compensation, but only explains a small part. This is based on the principal-agent theory that predicts that the shareholders will reward the CEOs when there is an increase in firm performance. The researchers use total profitability and various profit margins as measures of firm performance in firms not listed on the Oslo Stock Exchange, and in firms listed on the Oslo stock

Exchange they use measures as price-to-book ratio (P/B), return on assets (ROA) and shareholder return.

Ownership structure is another variable determining CEO compensation, and the theories predict that if the firm is owned by shareholders, the CEO compensation will be more dependent on firm performance. On the other hand, if the firm is owned by the CEOs, they can determine their compensation, and that CEO compensation will be higher in firm with many owners. Further, the characteristics of the board of directors also have an impact, as for instance if there are many directors or female directors in the board. Many directors can result in coordination problems and higher CEO compensation, as the CEOs easier can influence their decisions. Further, diversity within the board can either give the board more legitimacy or coordination problems. This can hence lead to higher or lower CEO compensation. The CEO’s gender, age and their tenure, and the tenure of the board leader can also influence the CEOs compensation according to the human capital theory and the managerial power theory.

Additionally, Randøy and Skalpe (2007) expect that CEO compensation varies of the firm’s localization and of which industry the firm operate in.

From the analysis of the data collected from 10 000 firms, the researchers find that an increase in turnover results in increased CEO compensation. Further, they find that there is a positive significant relationship between firm performance, measured by EBITDA, in a current year and CEO compensation one year later. This means that the CEOs in not listed firms negotiate their compensation in one year based on accounting based performance in the previous year.

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Their results further show that CEO compensation is influenced by turnover growth in small firms, and that it is difficult to document any relationship between CEO compensation and firm performance in large firms. Additionally, the researchers find that CEO compensation increases with firm size, populated areas and number of owners, and that a firm’s industry also have an impact when determining CEO compensation. They find that firm size has the most impact on the level of CEO compensation, but not on the change in CEO compensation.

Their results also show that female CEOs get lower compensations than male CEOs, and that CEO compensation is lower when the board leader is a female. This can be explained by that women are overrepresented in industries with low payments which also affect their

compensations in CEO positions. Further, they find that publicly owned firms have a negative impact on CEO compensation, which can be explained by the lack of resources in publicly owned firms.

For the firms listed on the Oslo Stock exchange, the results show that the firm performance measure, P/B has the greatest effect on CEO compensation. This is consistent with what they assumed, since the researchers consider P/B as the best indicator of long-term firm value.

Further, their results show that the board of directors’ ownership has a negative and significant effect on CEO compensation, but they find no significant effect of number of directors or female directors in the board on CEO compensation. The results also show that CEO’s age influence CEO compensation positively, but they show no significant effect of CEO’s tenure on CEO compensation, Inconsistent with the human capital theory, the researchers find a positive relationship between the board leader’s age and CEO

compensation. On the other hand, they find that the tenure of the board leader has a negative and significant effect on CEO compensation, hence this means that more experienced board leaders can decrease compensation to the CEOs, and not get easily influenced. Lastly, their results show that firm size, measured by market value, has a great impact on CEO

compensation.

As we see, this study includes many variables on how the CEO compensation is determined in addition to firm performance, as we consider as a strength. Another strength is that they have a large sample of firms, and they look at many aspects around the theories. This indicates that there are many factors that explain the CEO compensation rather than firm performance. We will discuss the similarities and differences of the previous empirical researches in the next subchapter, in order to see what we can expect and achieve in our study.

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