Determinants of variable pay for top managers of foreign subsidiaries in Finland

There is a large body of research dealing with top management compensation from an agency theory perspective. Difficulties in monitoring top managemen t (the agent) are exacerbated in the multinational corporation, where there are significant information asymmetries between headquarters and foreign s ubsidiaries. Headquarters may use variable pay for subsidiary top managers to reduce the agency problems. By studying 110 foreign-owned subsidiaries l ocated in Finland, this paper attempts to identify determinants of variable pay to the subsidiary general manager. In line with agency theory, the res ults suggest that the roles played by the subsidiary influence the compensa tion strategy used for the subsidiary general manager. However, while agenc y theory predicts that the cultural distance between the home country of th e multinational corporation and the location of the foreign subsidiary woul d have an effect on the compensation system, no such effect was found. Inst ead, in accordance with the institutionalization perspective, we found a si gnificant 'nationality effect' on the use of variable pay.