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Labor Unemployment Risk and CEO Incentive Compensation

Kelley School of Business Research Paper No. 15-43

61 Pages Posted: 14 May 2015 Last revised: 9 Nov 2017

See all articles by Andrew Ellul

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Cong Wang

The Chinese University of Hong Kong, Shenzhen

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2017

Abstract

We investigate the impact of workers’ exposure to unemployment risk on CEO incentive compensation. Exploiting state-level changes in unemployment benefits as a source of variation in workers’ unemployment costs, we find that after unemployment insurance benefits become more generous boards increase the convex payoff structure of CEO pay to encourage risk-taking. The increase in convexity payoff structures is stronger when CEO wealth is tied closely to firm performance, more pronounced in labor-intensive industries, and attenuated by the strength of unionization. Our findings suggest that executive compensation is one mechanism used by boards to internalize labor market frictions in firms’ decisions.

Keywords: Unemployment risk, Human capital, Executive compensation, Risk taking, Leverage

JEL Classification: G32,G34

Suggested Citation

Ellul, Andrew and Wang, Cong and Zhang, Kuo, Labor Unemployment Risk and CEO Incentive Compensation (November 1, 2017). Kelley School of Business Research Paper No. 15-43, Available at SSRN: https://ssrn.com/abstract=2606131 or http://dx.doi.org/10.2139/ssrn.2606131

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Cong Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

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