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Macroeconomic Fluctuations as Sources of Luck in CEO Compensation

Journal article
Authors H. H. Chiu
L. Oxelheim
C. Wihlborg
Jianhua Zhang
Published in Journal of Business Ethics
Volume 136
Issue 2
Pages 371-384
ISSN 0167-4544
Publication year 2016
Published at Department of Economics
Pages 371-384
Language en
Keywords Macroeconomic fluctuations, Luck, Corporate performance, CEO compensation, Moral hazard, Managerial power, relative performance evaluation, executive-compensation, pay, incentives, principals, contracts, Business & Economics, Social Sciences - Other Topics
Subject categories Economics and Business


Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad "luck" for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed agency role. The policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for.

Page Manager: Webmaster|Last update: 9/11/2012

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