Premium
Does Compensation Structure Alleviate Personal CEO Risks?
Author(s) -
Lord Richard A.,
Saito Yoshie
Publication year - 2012
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2012.02304.x
Subject(s) - salary , equity (law) , stock options , executive compensation , compensation (psychology) , business , actuarial science , stock (firearms) , economics , finance , corporate governance , psychology , political science , psychoanalysis , law , market economy , mechanical engineering , engineering
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.