Are CEOS Paid Extra for Riskier Pay Packages?
59 Pages Posted: 13 Aug 2018 Last revised: 5 Nov 2018
Date Written: October 31, 2018
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: Suggested Citation