The link between CEO pay and corporate social performance in Nordic countries

Abstract

Across countries, firms are facing increasing demands to integrate sustainable development practices into their operations and to act in a socially responsible manner. The purpose of this thesis is to shed light on how firms can respond to those demands and efficiently integrate economic, environmental, and social development goals into their corporate governance mechanisms. In particular, this thesis deals with CEO compensation plans as a corporate governance mechanism and studies whether CEOs in the Nordic countries, Finland, Sweden, Norway, and Denmark, are compensated based on corporate social performance, meaning financial as well as social, environmental and governance (ESG) performance of their companies. The link between CEO compensation and corporate social performance is studied by running panel data regressions with random effects, fixed effects, and first-difference models. Further, panel data with a cross-section of 99 Nordic main index firms from 2013 to 2017 is used. In the models, total CEO compensation is used as a dependent variable, whereas annual return, return on assets, return on equity, and ESG ratings are used as variables of interest. Total CEO compensation and ESG rating data are obtained from Institutional Shareholder Services Inc., whereas financial data are obtained from Morningstar. According to the results of this thesis, Nordic CEOs are compensated based on the financial performance of their companies, as measured by annual stock returns, return on assets, and return on equity. However, the link between CEO compensation and financial performance is rather small in economic terms. Moreover, Nordic CEOs seem not to be compensated based on the ESG performance of their companies since there does not exist a significant link between CEO compensation and ESG performance. The results show that, rather than corporate social performance, Nordic CEOs are compensated based on the size of their companies as well as based on the industry in which their company operates.