The Wages of Sin - Social Stigma Premium in Executive Compensation

43 Pages Posted: 24 Jul 2014 Last revised: 11 Jan 2016

See all articles by Jiri Novak

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Pawel Bilinski

City University London - Sir John Cass Business School

Date Written: October 13, 2015

Abstract

We document a significant premium of about 30 per cent in executive compensation in ‘sin’ industries (alcohol, gambling, and tobacco) that is not explained by standard compensation predictors such as higher managerial skill required in sin industries, higher risk of employment contracts, executive entrenchment, or a higher need for political capital at sin firms. Rather, the premium compensates for costs executives bear due to social ‘stigma’ related to work in industries perceived negatively in light of social norms. Correspondingly, the premium increases with social aversion to sin activities and reduces as firms offset negative social perception with image building. Further, to illustrate the type of costs executives in sin industries bear, we show that (1) sin firm executives are less likely to serve as directors on other boards, particularly at more esteemed firms, which suggests they enjoy lower social status, and (2) CEOs from sin firms are less likely to find employment within five years of leaving a sin firm, and if they do, it is at smaller, less prestigious firms. Our results highlight the significant impact violating social norms has on executive compensation contracts.

Keywords: executive compensation, sin firms, social norms

JEL Classification: G11, D71

Suggested Citation

Novak, Jiri and Bilinski, Pawel, The Wages of Sin - Social Stigma Premium in Executive Compensation (October 13, 2015). Available at SSRN: https://ssrn.com/abstract=2470393 or http://dx.doi.org/10.2139/ssrn.2470393

Jiri Novak (Contact Author)

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

Pawel Bilinski

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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