Ownership and Chief Executive Compensation: Evidence from Estonia

By using new panel survey data for Estonian firms with matching information for chief executives, evidence is presented on the determinants of the level of chief executive compensation during 1993-1997. Findings based on fixed effects models indicate that CEO pay is: (i) positively related to size (whether measured by total assets, employment or sales); (ii) often related to performance when measured by the return on assets or profit margin, but unrelated to productivity; (iii) strongly linked to firm ownership. Size elasticities range from 0.03 to 0.05 and performance elasticities average 0.06 (for return on assets) and thus are much smaller than comparable measures estimated in other studies. The most significant (statistically and economically) determinant of CEO pay is consistently found to be the ownership structure of the firm. CEOs in state-owned firms receive about 10-12% more pay than CEOs in private firms, ceteris paribus, and CEO pay differs by type of private ownership. Compared to state firms, it is statistically significantly lower in firms owned by employees (by about 15%) and higher (by 7-15%) in firms owned by foreigners. These findings are consistent with efficiency wage and monitoring hypotheses. Together with findings that CEO pay is lower in firms owned by domestic outsiders and that ownership by managers has no effect on compensation, these findings provide stronger support for hypotheses that stress the importance of non-pecuniary motivation.