Does Compensation Structure Alleviate Personal CEO Risks?

Richard Lord, Yoshie Saito

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

Are CEO compensation packages designed to alleviate some of the personal risks that they bear? We employ a unified framework to test the relationship between the four major components of executive pay; salary, bonuses, option grants and restricted stock grants, and four factors that increase CEOs' personal risks; the real value of their pay, the riskiness of firm equity, the value of their equity portfolios, and the delta of these equity holdings. We show that personal risks that CEOs face have significant effects on the design of their compensation contracts. Our results suggest that the portion of salary compensation decreases many of the personal risks that they face. There are intriguing differences between salary and bonuses on one hand, and option and restricted stock grants on the other. As predicted, we find that the delta of CEOs' equity portfolios have strong nonlinear relationships with the different forms of compensation; especially with option grants.

Original languageEnglish
Pages (from-to)1272-1297
Number of pages26
JournalJournal of Business Finance and Accounting
Volume39
Issue number9-10
DOIs
StatePublished - 1 Nov 2012

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Keywords

  • CEO compensation structure
  • Delta of executive equity portfolios
  • Executive stock holdings
  • Personal CEO risk bearing

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