CEO compensation and Corporate Governance: bridging the gap between shareholders and management conflicts of interest

Executive compensation has become one of the most debated topics in corporate governance, especially after various scandals that revealed significant discrepancies between business performance and pay packages received by top executives. The central concern revolves around the separation between ownership and management control, which often leads to conflicts of interest, particularly in publicly listed companies with dispersed shareholding. In these cases, CEOs may prioritize personal or short-term gains over the long-term interests of shareholders. To mitigate these risks, scholars have widely recommended pay-for-performance models that link CEO compensation to company performance, through short-term bonuses tied to immediate financial outcomes and other long-term incentives, as stock options, able to reward sustained growth and value creation. These incentive structures encourage CEOs to commit to the long-term health of the company, rather than focusing solely on short-term financial achievements. This important shift toward performance based compensation is regarded as a tool for balancing risk and reward by ensuring that executives are motivated to enhance shareholder value over the long run. This dissertation explores the theories and the legal frameworks, with a particular focus on agency theory, which highlights the conflict of interest between executives and shareholders. It examines corporate governance mechanisms that companies implement to safeguard shareholder interests, with a focus on the remuneration committees that play a key role in structuring executive pay in line with governance standards. An important aspect of corporate governance analysis is the independence of the board of directors, which is essential for providing objective oversight and reducing the potential for biased decision making. The importance of aligning CEO incentives with the long-term goals of the company is explored as a crucial aspect of effective governance. Moreover, it examines the key determinants of CEO compensation within major European insurance companies by analyzing factors like performance, labor market conditions, company size, complexity, growth potential and risk exposure. These variables are tested through multiple regression analysis, allowing a deeper understanding of how each factor influences the structure of executive remuneration. In conclusion, the study highlights the growing role of shareholders in shaping executive compensation through voting and engagement. In fact, shareholders are increasingly involved in reviewing and approving compensation packages, supported by proxy advisory firms that provide recommendations based on the alignment between pay and performance. This trend reflects a broader movement toward transparency and accountability in corporate governance, where shareholders have a greater say in how executives are rewarded. In summary, this paper explores the intricate relationship between CEO compensation, corporate governance and shareholder activism, particularly within the European insurance industry. It emphasizes the importance of designing compensation packages that not only attract and retain executive talent but also ensure that CEOs are held accountable for delivering sustainable value to the organization and its shareholders. This approach promotes accountability, enhances company performance and helps maintain competitiveness in the executive labor market.