CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships

CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships

Claire Yang Liu, Ronald Masulis, Jared Stanfield

Series number :

Serial Number: 
532/2017

Date posted :

September 22 2017

Last revised :

June 20 2018
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Keywords

  • Compensation • 
  • Firm performance • 
  • Product Market • 
  • Risk taking • 
  • supply chain

This paper studies how firms’ important customer relationships can affect the choice of CEO compensation structure. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives, leading to lower option-based compensation.

Using import tariff cuts as exogenous shocks to customer relationships, we find firms with major customers significantly reduce CEO option-based compensation following tariff reductions. We also document that following tariff cuts, the value of these relationships as well as the firm itself significantly decline in response to higher option compensation. Our study provides new insights into how important stakeholders shape executive compensation decisions.

Authors

Research Member
School of Banking and Finance, Australian School of Business
Real name:
Jared Stanfield
Real name:
Claire Yang Liu