Are CEOS Paid Extra for Riskier Pay Packages?

61 Pages Posted: 13 Aug 2018 Last revised: 3 Sep 2021

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Mary Ellen Carter

Boston College - Department of Accounting

Flora Dong

Kennesaw State University

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2021

Abstract

This paper estimates the risk premium in CEO incentive compensation. Using detailed U.S. CEO contract compensation data and simulation analysis, we find that CEOs with riskier pay packages are paid more. The estimated risk premium from total incentive pay represents 15% of total pay. We further decompose the risk premium between the premium that comes from bonus, stock, and options grants. We find a large premium in bonus grants comparable to the premium in options grants, though smaller than the premium in stock grants. Our findings point to the relevance of incentive-pay risk that originates from the use of performance metrics in cash bonuses.

Keywords: CEO pay, risk premium, incentive pay, contract theory, Incentive Lab, ARCH

JEL Classification: D81, G30, J33, M52

Suggested Citation

Albuquerque, Ana M. and Albuquerque, Rui A. and Carter, Mary Ellen and Dong, Qi, Are CEOS Paid Extra for Riskier Pay Packages? (September 3, 2021). European Corporate Governance Institute – Finance Working Paper 697/2020, Available at SSRN: https://ssrn.com/abstract=3217081 or http://dx.doi.org/10.2139/ssrn.3217081

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://sites.google.com/view/ruialbuquerque/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Qi Dong

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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