Abstract
In this paper, we investigate the effects of the Board of Directors’ (BoD) personal wealth invested in the company they govern on executive compensation. We employ a Swedish panel data set over 9 years, from 1999 through 2007, consisting of 314 individual CEOs in 186 listed companies. We find a significant negative relation between average board members’ personal wealth invested and the level of CEO compensation, beyond what is explainable by economic determinants. Further, we find a significant negative relation between board members’ personal wealth invested and the sensitivity of CEO pay to firm performance, which alludes to a substitution effect of governance mechanisms. These companies have on average higher dividend payouts. At the same time, we find strong positive effects on firm performance. Overall, our results suggest that companies, where directors’ “skin in the game” is higher, compensate their top management team more conservatively, while performing better.