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Are CEOS Paid Extra for Riskier Pay Packages?

European Corporate Governance Institute – Finance Working Paper 697/2020

62 Pages Posted: 13 Aug 2018 Last revised: 2 May 2022

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business; Massachusetts Institute of Technology, Sloan School of Management, Students

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

Qi (Flora) Dong

Kennesaw State University

There are 2 versions of this paper

Date Written: April 25, 2022

Abstract

This paper estimates the pay premium from CEO incentive compensation. Using detailed U.S. CEO contract compensation data and simulation analysis, we find that CEOs with riskier pay packages are paid a premium from pay at risk that represents 15% of total pay. The premium correlates positively with proxies for CEO risk aversion. We decompose the premium into its bonus, stock, and option grant components. We find a significant premium in stock grants, but not in bonus or option grants. Our estimates of the pay premium can serve as a benchmark to compensation consultants.

Keywords: CEO pay, risk premium, incentive pay, contract theory, Incentive Lab, ARCH

JEL Classification: D81, G30, J33

Suggested Citation: Suggested Citation

Albuquerque, Ana M. and Albuquerque, Rui A. and Carter, Mary Ellen and Dong, Qi (Flora), Are CEOS Paid Extra for Riskier Pay Packages? (April 25, 2022). European Corporate Governance Institute – Finance Working Paper 697/2020, Available at SSRN: https://ssrn.com/abstract=3217081 or http://dx.doi.org/10.2139/ssrn.3217081

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

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

HOME PAGE: http://sites.google.com/bu.edu/ana-albuquerque/home

Massachusetts Institute of Technology, Sloan School of Management, Students ( email )

Cambridge, MA 02139
United States

Rui A. Albuquerque (Contact Author)

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 (Flora) Dong

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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