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 :

October 01 2020
SSRN Share

Keywords

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

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, the elasticity of pay to the variance of pay is small, on average.

In the context of a theoretical model, we show that the small elasticity implies a low risk aversion coefficient for CEOs. Overall, our findings suggest that incentive pay is not too costly for firms, which may explain the heavy reliance on incentive pay by US firms.

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Authors

Real name:
Qi (Flora) Dong
Real name:
Mary Ellen Carter