Does Compensation Structure Alleviate Personal CEO Risks?

26 Pages Posted: 12 Jan 2013

See all articles by Richard A. Lord

Richard A. Lord

Montclair State University - School of Business

Yoshie Saito

Old Dominion University - College of Business & Public Administration

Date Written: November/December 2012

Abstract

Are CEO compensation packages designed to alleviate some of the personal risks that they bear? We employ a unified framework to test the relationship between the four major components of executive pay; salary, bonuses, option grants and restricted stock grants, and four factors that increase CEOs’ personal risks; the real value of their pay, the riskiness of firm equity, the value of their equity portfolios, and the delta of these equity holdings. We show that personal risks that CEOs face have significant effects on the design of their compensation contracts. Our results suggest that the portion of salary compensation decreases many of the personal risks that they face. There are intriguing differences between salary and bonuses on one hand, and option and restricted stock grants on the other. As predicted, we find that the delta of CEOs’ equity portfolios have strong nonlinear relationships with the different forms of compensation; especially with option grants.

Keywords: CEO compensation structure, personal CEO risk bearing, executive stock holdings, delta of executive equity portfolios

Suggested Citation

Lord, Richard A. and Saito, Yoshie, Does Compensation Structure Alleviate Personal CEO Risks? (November/December 2012). Journal of Business Finance & Accounting, Vol. 39, Issue 9‐10, pp. 1272-1297, 2012. Available at SSRN: https://ssrn.com/abstract=2199734 or http://dx.doi.org/10.1111/j.1468-5957.2012.02304.x

Richard A. Lord (Contact Author)

Montclair State University - School of Business ( email )

Upper Montclair, NJ 07043
United States
973-655-7448 (Phone)
973-655-7629 (Fax)

Yoshie Saito

Old Dominion University - College of Business & Public Administration ( email )

Norfolk, VA 23529-0222
United States

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