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CEO Personal Wealth, Equity Incentives and Firm Performance


  • Anna Elsilä,

  • Juha-Pekka Kallunki,

  • Henrik Nilsson,

  • Petri Sahlström

Address for correspondence: Juha-Pekka Kallunki, Department of Accounting, University of Oulu, P.O. Box 4600, FIN-90014 Oulu, Finland; Tel: +358 40 567 2508; E-mail:


Manuscript Type


Research Question/Issue

In this paper, we explore the determinants and performance effects of a novel measure of executive incentives, that is, the elasticity of a CEO's total wealth to firm performance, computed as a CEO's ownership value relative to her total wealth.

Research Findings/Insights

Using unique data on the total personal wealth of the CEOs of listed Swedish firms, we find that while CEOs typically own only a very small fraction of the shares of their firms, this ownership often constitutes a significant part of their total wealth. We also find that a CEO's total wealth elasticity is negatively associated with firm size and a CEO's age is positively associated with a firm risk environment. As for the effect on firm performance, we find that higher CEO's equity incentives enhance future accounting firm performance, when we estimate panel data regressions by taking into account the dynamic nature of endogeneity between a CEO's incentives and firm performance. However, we do not find any evidence that a CEO's equity incentives to be related to future stock returns.

Theoretical/Academic Implications

Our analysis suggests that executives' incentives when measured as price-performance elasticity are economically more significant than has been often argued in the literature. Moreover, due to several advantages of price-performance elasticity over traditionally used fractional ownership and dollar-at-stake measures, the inferences drawn from this study with respect to determinants and performance implications of a CEO's incentives may be superior to those from prior studies. The result on the relation between firm size and a CEO's incentives is especially interesting, because, unlike fractional ownership, the elasticity of a CEO's total wealth to firm performance is not spuriously related to firm size. With respect to the relation between incentives and subsequent firm performance, our results are consistent with the view that higher CEO's incentives, measured as price-performance elasticity, enhance firm accounting performance. Overall, future studies should consider price-performance elasticity as an alternative measure of executive incentives in addressing various research questions.

Practitioner/Policy Implications

The evidence in this paper suggests that executive incentives calculated relative to their non-firm wealth are economically more meaningful if compared to the traditionally used measures. As such, compensation consultants and boards of directors can consider this alternative measure when designing executive compensation plans and determining an appropriate level of ownership, when the information on executive non-firm wealth is available.