Slide 1 - Sven-Olof Collin by yurtgc548

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									         Trial lecture


Executive compensation:
 Governing the CEO or
    paying the price
      Sven-Olof Collin
         CORPORATE GOVERNANCE
                Exogenous Forces, i.e., Environment
           Legislation, culture, regulation, mass media etc



                     Corporate Governance
                          Mechanisms:
                              Capital
      Owner/           Managerial labour             Corporate
                     Executive compensation                          Performance
     Principal                                    Entrepreneurship
of the Corporation             Board
                             Auditors
                      Strategy & Structure
                         Product market
                     Part of the Environment




                                  effectiveness
EXECUTIVE COMPENSATION

     • High salaries
     • Bonus
     • Option schemes
THE COMPENSATION PUZZLE

                          40%

       Size of the firm
                                Executive Pay
   Performance of the firm

                          5%
COMPENSATION PUBLICITY

Percy Barnevik (ABB):        Börje Ekholm (Investor):
Terminal payment:            Profit sharing (terminal
901.000.000SKr,              payment): 111.000.000SKr
repay: 548.000.000SKr,
in pocket: 353.000.000SKr    Keith McLoughlin (Electrolux):
                             First year salary: 74.500.000Skr

          Foppa (Ice hockey): 105.000.000SKr
          Zlatan (Soccer): 81.000.000Skr
     EFFICIENT INCENTIVES
• Problem of governance: Align shareholder
  interest and CEO interest
• Goal: Maximize shareholder value
• Influence behavior of CEO through incentives:
  Correlation pay – share value
  => Payment in shares or options (right to buy a
  share at a predetermined price)

     Termed: “Strong efficient incentives”
              INCENTIVES
CORRELATION PAY - PERFORMANCE
• Piece work payment (potato harvest)
• Induce a kid to clean the room

My effort is only a function of my compensation
 CRITERIA FOR
COMPENSATION
  • Performance
  • Behaviour
  • Individual characteristics
  • Labour market price
  • Position
  • Peer comparison
                      salary

       CEO COMPENSATION
  – AN IMPORTANT PART OF THE
ORGANIZATIONS INCENTIVE SYSTEM
                      Winnings
 SKr


                       productivity




               Bets




                                      year
   Options are a CEOs best friend
• Family ownership reduce level of CEO
  compensation
• Ownership concentration reduce propensity to
  use options
• Conclusion: CEOs should pick firms with
  international investors and dispersed
  ownership = High wage and options
        SELECTION SYSTEM
• Selection of managers
  – Skills
  – Norms

  Þ Survival of those that do not need incentives
   every second
  Þ Survival of those with good norms, i.e., relvant
   duty
        SANCTION SYSTEM
• Inclusion &
  exclusion:
  Belongingness

• Cost of exit:
  The golden prison
    WHEN DO WE NEED THE
   STIMULUS OF INCENTIVES




Following wind, flat rod   Muddy road, adverse wind
       CASH FLOW - PAY
                 GOOD TIMES BAD TIMES

• WHEN CAN YOU
  AFFORD BIG
  SALARIES?

• WHEN DO YOU
  NEED BIG
  SALARIES?
      PAY – PERFORMANCE?
Pay when you have money
Promise (i.e., option) when you do not have
  money
             CONCLUSION
• CEOs are not 5 years old kids
• Compensation function of … performance,
  market price, golden prison etc
• Compensation part of organizational incentives
• Individuals act because they have to act
• Compensation in accordance with traditions
• Compensation a function of cash flow
POWER?

								
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