Are CEOS Paid Extra for Riskier Pay Packages?
61 Pages Posted: 13 Aug 2018 Last revised: 3 Sep 2021
Date Written: September 3, 2021
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
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