Labor Unemployment Risk and CEO Incentive Compensation
61 Pages Posted: 14 May 2015 Last revised: 9 Nov 2017
Date Written: November 1, 2017
We investigate the impact of workers’ exposure to unemployment risk on CEO incentive compensation. Exploiting state-level changes in unemployment benefits as a source of variation in workers’ unemployment costs, we find that after unemployment insurance benefits become more generous boards increase the convex payoff structure of CEO pay to encourage risk-taking. The increase in convexity payoff structures is stronger when CEO wealth is tied closely to firm performance, more pronounced in labor-intensive industries, and attenuated by the strength of unionization. Our findings suggest that executive compensation is one mechanism used by boards to internalize labor market frictions in firms’ decisions.
Keywords: Unemployment risk, Human capital, Executive compensation, Risk taking, Leverage
JEL Classification: G32,G34
Suggested Citation: Suggested Citation