Are CEOS Paid Extra for Riskier Pay Packages?

59 Pages Posted: 13 Aug 2018 Last revised: 5 Nov 2018

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

Pennsylvania State University

Date Written: October 31, 2018

Abstract

A fundamental hypothesis in optimal contracting models is that incentive pay is expensive to the principal because risk averse agents require extra pay to hold riskier pay packages. We test this hypothesis on U.S. CEO compensation data using a variety of datasets and empirical approaches. We find that CEOs with riskier pay packages are paid more on average, but the additional pay appears to be economically small. We also find that CEOs are willing to earn less on average when faced with pay packages that have positive skewness, e.g., packages with stock and option grants that offer the opportunity to avoid downside risk. Founder CEOs are compensated less for risk than non-founder CEOs and have lower preference for positive skewness in pay.

Keywords: Contract Theory, Moral Hazard, Participation Constraint, Risk Aversion, Incentive Lab, Realized Variance, ARCH, Skewness

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? (October 31, 2018). 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 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://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 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

Pennsylvania State University ( email )

Station Road
Erie, PA 16563
United States

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