Executive compensation : does state ownership matter?

Abstract

Managers often exercise their discretion in ways that benefit them personally. For instance, they may retain surplus cash instead of distributing it to shareholders or excessively expand the firm's operations when profitable investment opportunities are lacking. Managers may also entrench themselves in their positions, resisting dismissal even in the face of poor performance. Agency theory posits that contractual designs, such as equity stakes and performance-based pay, can help align the interests of managers and shareholders. However, it is argued that regulation, political constraints, and governmental review limit the incentives available to managers, thereby weakening the pay-for-performance relationship. We examine whether state ownership affects the level of executive compensation and the pay-for-performance relationship. Analysing cross-sectional data from 2023 on firms listed on the Helsinki Stock Exchange, and controlling for classic pay determinants, board characteristics, and executive characteristics, we find no evidence that state ownership would affect the level of executive compensation or the pay-for-performance relationship. However, this does not necessarily rule out the existence of political constraints, as the firms in our sample are only partially state-owned, while most firms with substantial amounts of state ownership are not listed. Nonetheless, we find robust evidence that supports previous research. First, we show that firm size is the most significant determinant of pay, with an estimated pay-size elasticity of approximately 0.3. Second, we find that the pay-for-performance relationship is weak and statistically insignificant once all control variables are included. Third, we observe that riskier firms offer higher compensation to offset the greater wealth uncertainty faced by executives. Finally, we demonstrate that larger boards are less effective at monitoring, evidenced by higher level of executive compensation.