Are CEOS Paid Extra for Riskier Pay Packages?

64 Pages Posted: 12 Sep 2020 Last revised: 15 Sep 2020

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Mary Ellen Carter

Boston College - Department of Accounting

Flora Dong

Kennesaw State University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

This paper quantifies the cost of CEO incentive compensation by estimating an elasticity of pay to the variance of pay. This metric is based on the benchmark moral hazard model widely used to study CEO pay. Using US CEO compensation data and a variety of empirical approaches, we find that CEOs with riskier pay packages are paid more. However, the estimated elasticity of pay to the variance of pay is small. This small elasticity implies a low risk aversion coefficient for CEOs and a risk premium that is at most 12% of total pay. This risk premium is about evenly split between compensation for risk in cash bonus, stock grants, and option grants. Overall, our findings suggest that incentive pay is not too costly for firms from a risk-diversification perspective, which may explain the heavy reliance on incentive pay by US firms, and cast doubt on the ability of the benchmark moral hazard model to explain CEO pay in the US.

JEL Classification: D81, G30, J33, M52

Suggested Citation

Albuquerque, Ana M. and Albuquerque, Rui A. and Carter, Mary Ellen and Dong, Qi, Are CEOS Paid Extra for Riskier Pay Packages? (September 2020). CEPR Discussion Paper No. DP15243, Available at SSRN: https://ssrn.com/abstract=3688197

Ana M. Albuquerque (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Rui A. Albuquerque

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://sites.google.com/view/ruialbuquerque/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Qi Dong

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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