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RESEARCH PRODUCT

Macroeconomic Fluctuations as a Source of Luck in CEO Compensation

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Macroeconomic fluctuations such as interest rate and exchange rate can be considered sources of good or bad “luck” for corporate performance. Incentive effects of performance-based compensation for management may be weakened or biased by macroeconomic influences depending on the ability of management to adjust for operations. We decompose the impacts on CEO compensation to distinguish between macroeconomic (anticipated and unanticipated) and “intrinsic” sources. Total CEO compensation is measured by including options awarded or options exercised. Both measures depend strongly on variations in macro factors but the time patterns differ. The macroeconomic factors increased total awarded compensation as much as 30 percent in one period and reduced awarded compensation 14 percent in another period. The effect on realized compensation ranges from positive 44 percent to negative 16 percent. The average annual absolute effect lies within the range of 11 to 16 percent.