CEO Contract Design Regulation and Risk-Taking

55 Pages Posted: 10 Nov 2015

See all articles by Johannes Sauset

Johannes Sauset

University of Goettingen (Gottingen) - Department of Economics

Phillip Waller

University of Goettingen (Gottingen)

Michael Wolff

University of Göttingen

Date Written: April 30, 2015


Since 2009, the European Commission requires firms to incorporate an array of new elements into CEO compensation contracts, such as bonus caps, claw back provisions, bonus deferral, performance-vesting, and minimum shareholding guidelines. This paper examines whether CEO contract design in line with the EC principles reduces risk-taking and its economic consequences. Using hand-collected contract design data of 763 firm-years from European listed non-financial firms, we construct an index that reflects a firm's contract fit with the EC principles. Complemented by hand-collected data of national regulatory changes consistent to the EC principles, we employ the regime shift as quasi-experiment. We find that CEOs rewarded under contracts more in line with the principles choose lower risk profiles with respect to their country peers by divergent reductions of idiosyncratic and systematic risk-taking. Moreover, intensity of change of the regulatory environment negatively affects systematic risk-taking. However, reduced risk-taking might lead to reduced subsequent performance.

Keywords: Management compensation; CEO contract design; Risk-taking; Institutional differences

JEL Classification: G32, G34, J33, M52

Suggested Citation

Sauset, Johannes and Waller, Phillip and Wolff, Michael, CEO Contract Design Regulation and Risk-Taking (April 30, 2015). European Accounting Review, Forthcoming. Available at SSRN: or

Johannes Sauset

University of Goettingen (Gottingen) - Department of Economics ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073


Phillip Waller

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073

Michael Wolff (Contact Author)

University of Göttingen ( email )

Platz der Göttinger Sieben 3
Göttingen, DE 37073


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