The Impact of Risk and Monitoring on CEO Compensation
49 Pages Posted: 22 Aug 2010
Date Written: August 20, 2010
This paper uses a novel empirical setting to explore the association between a firm’s operational risk, managerial monitoring costs, and how managers are compensated. We investigate a sample of supplier firms that rely on a few large customers for the bulk of their revenues. We predict that supplier firms with higher customer concentration face both higher exogenous idiosyncratic risk and lower monitoring costs and, as a result, will rely less on equity-based managerial incentive compensation contracts. Our empirical results support this prediction.
Keywords: CEO, Compensation, Customers, Incentives, Monitoring, Risk, Suppliers
JEL Classification: G30, D81, M40
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