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 :

October 17 2017
SSRN Suggested citation Download this paper Open PDF Share

Keywords

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

The executive compensation literature reports inconclusive results for CEO option-based compensation’s impact on firm value. We hypothesize that having major customers raises the costs associated with option compensation, leading to a lower optimal level for CEO option-based compensation.

Using import tariff cuts as exogenous shocks to existing customer relationships, we find strong empirical support for this hypothesis. Firms with large customers dramatically reduce CEO option-based compensation following tariff reductions. CEO option compensation significantly undercuts firm value in the presence of major customers as these trade relationships weaken. 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