Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships

Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships

Claire Yang Liu, Ronald Masulis, Jared Stanfield

Series number :

Serial Number: 
532/2017

Date posted :

September 22 2017

Last revised :

September 06 2020
SSRN Share

Keywords

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

We study how the existence of important production contracts affects the choice of CEO compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions in the U.S.

as exogenous shocks to customer relationships, we find firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts, is associated with significant declines in these relationships and in these firms’ performance. Our study provides new insights into how important stakeholders shape executive compensation decisions.

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Authors

Real name:
Jared Stanfield
Real name:
Claire Yang Liu