Regulation of CEO Incentive Pay in Listed Companies - From a Behavioral Economics Perspective

Julie Petring

Student thesis: Master thesis


In Danish listed companies and all over the world, incentive pay in the form of annual bonuses or long-term incentive plans are account for an increasing proportion of a CEO’s total remuneration. This trend is increasing despite the fact that incentive pay is often considered to have encouraged short-termism and ‘cooking of the books’. As a result, the area of incentive pay is becoming increasingly regulated. By applying the theory of behavioral economics, this study examines the impact of further regulation on incentive pay. After a brief introduction to the research objective and methods applied, the development of incentive pay in Danish Large Cap companies over the past four years will be examined, and in that connection three of these companies’ incentive pay policies will be explored. Through a judicial interpretation it is shown that the purpose of Danish regulation of the area is to allow shareholders to exercise their rights and to allow potential investors to know into what they might be investing. The regulation is particularly strict for financial companies, but an EU directive adopted in April 2017 will impose legal requirements for more transparency on all listed companies. Subsequently, the theory of behavioural economics theory will be used to analyse the CEO’s perception of incentive pay, as it is today. The assumption of the CEO as one who is always aware of his/her own preferences, always makes rational choices to maximize utility, and desires wealth and not work is challenged as the analysis shows how a CEO will be subject to cognitive bias, resulting in bounded rationality. Furthermore, CEOs will work hard if motivated to do so, and motivation comes not only from monetary incentives. The legal analysis and economic analysis are then brought together in an integrated analysis to predict possible unintended effects of the directive mentioned above. As a result of a judicial policy analyses, two suggestions are made: to deregulate and/or to adopt a ‘Two-Strike’ rule, holding the board more accountable. Lastly, the study concludes with a discussion of the possible effects of regulating executive further

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2017
Number of pages124
SupervisorsPeer Schaumburg-Müller & Caspar Rose