Agency conflicts, executive compensation regulations and CEO pay-performance sensitivity : evidence from Sweden

Based on a unique country set up with concentrated ownership of firms, strong representation of major shareholders on boards and one of the highest percentages of firms with dual-class shares worldwide I study CEO pay-performance sensitivity in Swedish listed firms in the years 2001–2013. Focusing on Type II agency conflict, I find that that pay-performance sensitivity in family-controlled firms with family CEOs is significantly lower than in other types of firms, and that dual-class firms have significantly lower sensitivity of pay to accounting performance than non-dual-class firms. The results suggest that in firms with type II agency conflicts compensation practices may be driven either by family ties or by the power preferences of the controlling shareholder that uses compensation to align CEO’s interest with his/her will rather than with financial performance. The study also documents that the link between CEO pay and performance disappears in the 2010–2013 period following the implementation of the European Recommendations regarding executive compensation. This finding is in contrast to the stipulated goal of the European Commission, ‘to ensure pay for performance’ (European Commission 2009)