Executive Compensation, Risk Taking and the State of the Economy

39 Pages Posted: 6 Dec 2010 Last revised: 1 Sep 2011

See all articles by Alon Raviv

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Elif Sisli Ciamarra

Stonehill College

Date Written: August 2011

Abstract

In this paper we present a model of executive compensation to analyze the link between incentive compensation and risk taking. Our model takes into account the loss in the value of an executive’s expected wealth from employment if the firm becomes insolvent during a bad state of the economy. We illustrate that a given compensation package may lead to different levels of asset risk under different economic states. Most importantly, we show that the positive relationship between equity-based compensation and risk taking may weaken and possibly disappear during systemic financial crises. An important policy implication from our analysis is that similar regulations may have different effects on risk taking depending on the state of the economy.

Keywords: executive compensation, risk taking, regulation, equity based compensation, economic crisis

JEL Classification: G12, G13, G21, G28, G38, E58

Suggested Citation

Raviv, Alon and Sisli Ciamarra, Elif, Executive Compensation, Risk Taking and the State of the Economy (August 2011). Available at SSRN: https://ssrn.com/abstract=1719426 or http://dx.doi.org/10.2139/ssrn.1719426

Alon Raviv (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

Elif Sisli Ciamarra

Stonehill College ( email )

259 Duffy
Easton, MA 02357
United States

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