Tailoring Compensation Contracts: Evidence from Early Life Disaster Exposure and CEO Compensation

Abstract

Do firms tailor compensation contracts to fit CEOs' individual behavioral traits, and if so, how? We explore this by focusing on CEOs' early life exposure to 'extreme fatality' disasters. Prior literature shows that this can drive agency conflicts of risk aversion. We hypothesize and show that firms alter CEOs' compensation contracts to mitigate this: such disaster-exposed CEOs receive a 5.24% higher compensation delta and a 6.43% higher compensation vega. Further, a higher proportion of their compensation comes from stock and options. The effect is also conditional on governance and corporate attributes. We take steps to mitigate identification and econometric concerns.

Keywords: Compensation, Corporate Governance

JEL Classification: G34