Executive Compensation and Corporate Insiders’ Personal Traits

This dissertation examines chief executive officers’ (CEO) compensation schemes from a behavioural perspective. In particular, the focus of all three papers comprising the thesis is on personal attributes of individuals - both of the compensated managers at hand as well as of those paying and monitoring them. Summing up all three papers, the overarching question would be "What effect do personality traits have on how (much) CEOs are paid?". The dissertation employs a unique dataset from Sweden, which enables interesting insights and access to personal characteristics such as individuals' IQ scores, their past criminal convictions, or their wealth and income.

In the first paper, which deals with personality traits of the CEO themself, we find that CEOs, who have been criminally convicted - prior to their job -, actually earn relatively less, on average. Their compensation packages are also riskier of nature, meaning their payout depends more on factors not necessarily in their own control. We interpret this as risk-loving CEOs (e.g., some convictions are due to drunk driving) being willing to accept a risky pay-package without asking for a (monetary) safety net, as a risk-averse CEO might do.

In the second and third paper, the people of interest are those designing the pay package of the CEO, namely the members of the board of directors. Paper two uses data on directors' cognitive (IQ) and non-cognitive (EQ) intelligence and finds that the smarter the directors are, the more aligned a CEO's pay is with firm performance. This works as an incentive mechanism: when pay is aligned with performance, the paid person will generally exert more effort to earn more. In the third paper, we try to capture the intrinsic motivation of directors to do a 'good' job (i.e., to not overpay the CEO but still make sure they work hard). The proxy for motivation is that portion of a director's personal wealth that (s)he has invested in the firm in which (s)he needs to monitor the CEO. The results show that those 'more motivated' directors do indeed manage to pay their CEOs more efficiently: The level of pay is lower for those CEOs, but the firm performance does not suffer from it - on the contrary, the firms perform relatively better, on average.

Overall, the findings contribute to the literature on CEO pay not lastly due to the richness of the data. Neoclassical economic theory has abstracted away any potential behavioural components, and empirical research has a hard time incorporating them because it is difficult to measure and/or obtain such personality-trait-proxies. Combined, the three papers shed some light on how individuals' personal traits and preferences influence managerial compensation.