An investigation into interlinkages between CEO compensation and firm risk

Purpose: The purpose of this research is to do an investigation on the interlinkages between CEO compensation and the firm risk. It further intends to see in particular, whether the firm risk has been interlinked with components of compensation like CEO’s incentive/bonus and stock options. Theoretical framework: CEO compensation, Incentives programs, Stock option, Risk management, Principal agency theory, Managerial power theory, Econometrics. Method: Regression analysis were CEO compensation is a dependent variable in one regression, Proportion of incentive/bonus in one regression and Stock option as a limited dependent variable. Explanatory variables are firm risk, firm size and leverage. Quality test were performed on the data to secure the credibility and reliability of the data. Empirical analysis: Found a significant relationship, but negative one, between CEO compensation with leverage. Insignificant relationship was both with firm risk and firm size. For analysis of the relationship of Proportion of incentives/bonus all of the explanatory variables were insignificant. Significant relationship was found between stock option and both leverage and firm size. A negative with leverage and a positive one for firm size. Insignificant relationship with firm risk. Based on 95% α-level. Conclusion: Based on analysis of Swedish large cap companies the CEO compensation is mostly influenced by managerial power theory rather than agency theory. CEO supply and demand forces can influence the compensation structure. No evidence for the dependency of compensation with firm risk, leverage and size.