Determinants of variable pay for general managers of foreign-owned subsidiaries in Finland

There is a large body of research dealing with top management compensation
from an agency theory perspective. Dif!culties in monitoring top management (the agent) are exacerbated in the multinational corporation, where there are signi!cant information asymmetries between headquarters and foreign subsidiaries. Headquarters may use variable pay for subsidiary top managers to reduce the agency problems. By studying 110 foreign-owned subsidiaries located in Finland, this paper attempts to identify determinants of variable pay to the subsidiary general manager. In line with agency theory, the results suggest that the roles played by the subsidiary infuence the compensation strategy used for the subsidiary general manager. However, while agency theory predicts that the cultural distance beween the home country of the multinational corporation and the location of the foreign subsidiary would have an effect on the compensation system, no such effect was found. Instead, in accordance with the institutionalization perspective, we found a signi!cant ‘nationality effect’ on the use of variable pay.