Does Compensation Structure Alleviate Personal CEO Risks?

Authors

  • Richard A. Lord,

  • Yoshie Saito

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    • The authors are respectively from Montclair State University and Old Dominion University. They thank the editor, Steven Young, and an anonymous referee for their very helpful comments in developing the paper. Any errors or omissions are the responsibility of the authors. (Paper received December 2008, revised version accepted June 2012)


Richard A. Lord, Department of Economics & Finance, Montclair State University, Upper Montclair, New Jersey 07043, USA. e-mail: lordr@mail.montclair.edu

Abstract

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.

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