Firm Risk Taking versus CEO Diversification: Evidence from Outsourcing Firms
52 Pages Posted: 3 Dec 2012
Date Written: November 1, 2012
I examine CEO compensation in outsourcing firms, using a new database of purchase obligations from firm 10-Ks. I find that the intensity of outsourcing can significantly explain the variations in CEO compensation; the more the firms do outsourcing, the more they pay to their CEOs. Outsourcing firms promote managerial risk-taking by using proportionally more equity-based compensation. However, they also need to compensate additionally their CEOs for the higher risk exposure to the firms' increased total risks. I show that outsourcing firms determine their compensation level and structure based on this optimal trade-off.
Keywords: Outsourcing, Risk taking, CEO compensation
JEL Classification: G31, J33, L23, O32
Suggested Citation: Suggested Citation