CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships

60 Pages Posted: 27 May 2016 Last revised: 18 Jun 2018

See all articles by Claire Liu

Claire Liu

University of Technology Sydney (UTS)

Ronald W. Masulis

University of New South Wales - Australian School of Business; 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: June 2018

Abstract

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

Liu, Claire and Masulis, Ronald W. and Stanfield, Jared R., CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships (June 2018). 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 Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Ronald W. Masulis

University of New South Wales - Australian School of Business ( 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 ECARES ULB CP 114
B-1050 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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