Risk Premia in Executive Compensation: A Life-Cycle Perspective
48 Pages Posted: 22 Mar 2011
Date Written: March 15, 2011
Abstract
This paper employs a life-cycle model of consumption and saving to study risk premia in CEO compensation, and compares them to variation in observed pay levels. The model incorporates the main types of risk to income and savings that executives of public corporations typically face: option- and stock-based pay, pay-performance sensitivity, dismissal risk, and stock return volatility. A calibration to a large panel of US CEOs shows that, for realistic degrees of risk aversion, risk premia can explain about 20 percent of the cross-sectional variation in CEO pay, and between 10 and 20 percent of the evolution of average pay levels over time. Thus, increases in risk exposures can only partially explain the surge in executive pay levels over the past decades. In contrast, the model captures very well the skewness of the cross-sectional pay distribution.
Keywords: CEO compensation, incentive compensation, risk premia, life-cycle models
JEL Classification: G30, D91
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
The Use of Equity Grants to Manage Optimal Equity Incentive Levels
By John E. Core and Wayne R. Guay
-
The Other Side of the Tradeoff: the Impact of Risk on Executive Compensation
-
Stock Options for Undiversified Executives
By Brian J. Hall and Kevin J. Murphy