Tailoring Compensation Contracts to Moderate the Effect of CEOs’ Behavioral Attributes on Corporate Outcomes

Abstract

CEO behavioral attributes significantly influence corporate outcomes. We hypothesize and show that firms can moderate this impact via compensation contracts. We examine how firms tailor compensation contracts based on CEOs’ early life disaster exposure, which can shape their risk aversion. On average, firms mitigate risk aversion by offering a 5.24 percent higher compensation delta and a 6.43 percent higher compensation vega, with a more significant proportion of compensation comprising stock grants and options. The ability to adjust compensation depends on governance and corporate attributes. Compensation adjustments significantly moderate the impact of disaster exposure (risk aversion) on corporate outcomes, such as innovation and risk-taking. We bolster identification by exploring exogenous CEO turnovers and a quasi-experiment utilizing the option expensing rule, FAS123R. We highlight the importance of including moderating effects, such as compensation, when analyzing the impact of CEO attributes on corporate outcomes.

Keywords: Compensation, Corporate Governance

JEL Classification: G34