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Oxelheim, Lars; Wihlborg, Clas; Zhang, Jianhua --- "How to Avoid Compensating the CEO for Luck: The Case of Macroeconomic Fluctuations" [2012] ELECD 606; in Thomas, S. Randall; Hill, G. Jennifer (eds), "Research Handbook on Executive Pay" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Executive Pay

Editor(s): Thomas, S. Randall; Hill, G. Jennifer

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849803960

Section: Chapter 8

Section Title: How to Avoid Compensating the CEO for Luck: The Case of Macroeconomic Fluctuations

Author(s): Oxelheim, Lars; Wihlborg, Clas; Zhang, Jianhua

Number of pages: 24

Extract:

8 How to avoid compensating the CEO for luck:
the case of macroeconomic fluctuations
Lars Oxelheim,* Clas Wihlborg and Jianhua Zhang**
1 2




1 INTRODUCTION

Executive compensation is under scrutiny and there are calls for regulation and "codes
of conduct" with respect to levels as well as forms of compensation. Although the level
of compensation in Europe remains below that in the US, the level in most European
countries has increased rapidly in the new millennium. According to Fernandes et al.
(2008) the difference between Europe and the US can be explained to a large extent by
the larger variable component of executive compensation in the US. The higher variabil-
ity in the US seems to be associated with a risk-premium. This observation implies that
levels and forms of compensation are not independent.
One common view in the current debate is that CEO compensation should be linked
to "sustainable" profits that presumably are the result of skill and effort. Regulation
seems to be emerging in many countries stating that the reward for improved perform-
ance should not be fully realized unless the improved performance is observed for a
period of 3­5 years. Increased compensation would be linked to performance surpassing
some benchmark for some duration. The argument behind such proposals would be that
improved performance is likely to be caused by other factors than executive skill and
effort if it does not exceed a benchmark for duration of time. The other factors could be
earnings management by the ...