Job Security and CEO Compensation

Abstract

We analyze a sample of 2,914 hiring contracts and show how job security plays a role in pay negotiation. We find a significant impact of job security on CEO pay using both firm and industry-level measures across US firms. In general, CEO candidates and the board members would trade pay for job security. We find this pay for job security also follows a hierarchy order; when a firm is unable to compensate job risk with a higher pay, the CEO will seek for alternative ways of compensation, including a severance agreement, a shorter grant vesting period, and an incentive plan metric that is easier to achieve. Moreover, job security has no value among risk-takers, and this value increases with CEO’s risk aversion. By examining the impact of job security under different market condition, we find that this pay concession disappears when the CEO labor market is more favorable to the CEOs.

Keywords: CEO compensation, job security, risk aversion

JEL Classification: G3, G02, D81, L26