Are CEOs paid extra for riskier pay packages?

Are CEOs paid extra for riskier pay packages?

Ana M. Albuquerque, Rui Albuquerque, Mary Ellen Carter, Qi (Flora) Dong

Series number :

Serial Number: 
697/2020

Date posted :

September 11 2020

Last revised :

September 11 2020
SSRN Share

Keywords

  • CEO pay • 
  • Incentives • 
  • Incentive Lab • 
  • realized variance • 
  • ARCH • 
  • contract theory • 
  • moral hazard • 
  • participation constraint • 
  • risk aversion.

This paper quantifies the cost of CEO incentive compensation by estimating an elasticity of pay to the variance of pay. Using US CEO compensation data and a variety of empirical approaches, we find that CEOs with riskier pay packages are paid more. However, increasing incentives by 20% is associated with an increase in expected pay of only 2%, on average.

This small elasticity suggests that incentive pay is not too costly for firms as these seem to be able to substitute incentive pay for salary. In the context of a theorical model, we show that the small elasticity implies a low risk aversion coefficient for CEOs

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Authors

Real name:
Qi (Flora) Dong
Real name:
Mary Ellen Carter
Real name:
Ana M. Albuquerque