CEO Compensation, Diversification and Incentives

Posted: 27 Jun 2003

See all articles by Li Jin

Li Jin

Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper


This paper examines the relation between Chief Executive Officers' (CEOs') incentive levels and their firms' risk characteristics. I show theoretically that, when CEOs cannot trade the market portfolio, optimal incentive level decreases with firm's nonsystematic risk but is ambiguously affected by firm's systematic risk; when CEOs can trade the market portfolio, optimal incentive level decreases with nonsystematic risk but is unaffected by systematic risk. Empirically I find support for these predictions. Furthermore, I find that incentives for CEOs likely facing binding short-selling constraints decrease with systematic as well as nonsystematic risk, as predicted by theory. Thus, compensation practice is consistent with predictions of theory.

Keywords: Executive Compensation, Diversification, Firm-Specific Risk, Incentives, Pay-Performance Sensitivities

JEL Classification: J33, G30, G32, G34, G11

Suggested Citation

Jin, Li, CEO Compensation, Diversification and Incentives. Journal of Financial Economics, 2002, Available at SSRN:

Li Jin (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-5590 (Phone)
617-496-5271 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics