DIFFERENT TYPES OF COMPENSATION AND OBSERVABLE LUCK FOR DUTCH CEOS

The Principal-agent theory states that, under the assumption of a risk-averse agent and a risk-neutral principal, the risk should be allocated optimally between the principal and the agent. The literature on management control states that under certain circumstances the agent should bear some risk in the form of incentive pay. These incentives deliver risk and can influence the performance both in a good, as well as in a bad way. In order to test for this relationship, we gathered information regarding the compensation of the CEOs, and the performance of Dutch firms. This data was assembled from the Wharton Research Data Services. This was supplemented by information on the investment performance for the Nasdaq and Dow Jones. Finally the relationship between compensation and luck is tested by using a TSLS model with the return on investments for both the Nasdaq, as well as the Dow Jones as instrumental variables. We find that this risk is a driving force behind the compensation for Dutch CEOs. This leads to the conclusion that CEOs of Dutch companies are paid for observable luck. We analysed this by using three types of compensation namely total compensation, base wage, and bonus. All types of compensation show to have a positive relation with observable luck.