CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships
60 Pages Posted: 27 May 2016 Last revised: 18 Jun 2018
Date Written: June 2018
This paper studies how firms’ important customer relationships can affect the choice of CEO compensation structure. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives, leading to lower option-based compensation. Using import tariff cuts as exogenous shocks to customer relationships, we find firms with major customers significantly reduce CEO option-based compensation following tariff reductions. We also document that following tariff cuts, the value of these relationships as well as the firm itself significantly decline in response to higher option compensation. Our study provides new insights into how important stakeholders shape executive compensation decisions.
Keywords: Compensation, Firm Performance, Product Market, Risk Taking, Supply Chain
JEL Classification: G30, J33, L22
Suggested Citation: Suggested Citation