Ownership influences both the level and composition of executive compensation. The present study examines this by adding identity of the owner and the owner’s capacity to create a governance strategy to the traditional ownership concentration measure. Through a test on Swedish corporations listed as on 2008, it is found that the identity of the owner influences the level of compensation, and the concentration of ownership negatively influences the propensity to use options. This is interpreted as a sign that options are not so much an incentive instrument, aligning the CEO’s interest with the absent owners’ interest, but more of a recruitment instrument and an indication of CEO strength.

Executive Compensation (EC) have attracted a lot of attention, both in public debate and in educated debate. In the educated debate (e.g., Stigler and Friedland, 1983; and Tosi et al., 2000), the level and composition of EC has been explained by human resource factors, marketing factors, governance factors and recently by strategic competitive advantage. Human resource factors include the need to compensate the individual and the competence of the individual (Gomez-Mejia and Wiseman, 1997), and the need to recruit and retain individuals (Finkelstein and Hambrick, 1988). Marketing factors concern the need to create a corporate image. Strategic competitive advantage concerns the usage of compensation schemes at the corporate level in order to induce knowledge sharing among subsidiaries (Fey and Furu, 2008). Finally, the governance aspect of EC concerns the need to engage and stimulate the individual and the need to manage agency costs through monitoring and incentives (Chan, 2008). We will focus on the governance issue of EC, thus treating EC as a governance mechanism (Schleifer and Vishny, 1997).

But why bother about agency costs in EC? Agency cost inherent in EC is small compared to what is at stake, for example, agency costs created by excessive spending on houses and employees, and by investments in unprofitable projects that raise the personal status of the Chief Executive Officer (CEO). Goldberg and Idson (1995) remark that the latter costs are less visible than EC, making it easier and wiser for an opportunistic CEO to exploit the corporation through less visible accounts. We claim that it is important to investigate EC because: (1) EC offers means that are more easily consumed and more conducive to private use; (2) Executives are not only managers but also leaders of an organization, and as such they are the role models and creators of the internal compensation schemes, implying that their behavior will transmit to the whole organization (Werner et al., 2005); and most important, (3) Agency costs in EC could be a powerful indicator of other agency costs, since if the visibility of EC will reduce its usage, even a small fraction of agency costs detected in EC could imply large agency costs in the organization (cf. Dyl, 1988).

Corporate Governance Journal, Executive Compensation (EC), Chief Executive Officer (CEO), Formulation of Hypotheses, Homogeneity Hypothesis, CEO’s Best Friend, Executive, Compensation, Swedish, Listed Corporations.