Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships

96 Pages Posted: 27 May 2016 Last revised: 2 Sep 2020

See all articles by Claire Liu

Claire Liu

University of Sydney

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Jared R. Stanfield

University of Oklahoma; Financial Research Network (FIRN)

Date Written: August 22, 2020

Abstract

We study how the existence of important production contracts affects the choice of CEO compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions in the U.S. as exogenous shocks to customer relationships, we find firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts, is associated with significant declines in these relationships and in these firms’ performance. 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

Liu, Claire and Masulis, Ronald W. and Stanfield, Jared R., Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships (August 22, 2020). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 532/2017, Available at SSRN: https://ssrn.com/abstract=2784567 or http://dx.doi.org/10.2139/ssrn.2784567

Claire Liu

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Ronald W. Masulis

University of New South Wales, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Jared R. Stanfield (Contact Author)

University of Oklahoma ( email )

Norman, OK 73019
United States

HOME PAGE: http://jaredstanfield.com

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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