Working Paper: CEPR ID: DP15243
Authors: Ana Albuquerque; Rui Albuquerque; Mary Ellen Carter; Flora Dong
Abstract: We estimate the pay premium associated with CEO incentive compensation. Using explicit detailed U.S. CEO compensation contract data and simulation analysis, we find that CEOs with riskier pay packages receive a premium for pay at risk that represents 13.5 percent of total pay. The premium is positively correlated with proxies for CEO risk aversion, but implied risk aversion values suggest that the premium is economically smaller than suggested by prior studies. We perform our tests using a variety of proxies to measure the variance of pay and find consistent evidence of economically small pay risk premiums. These results are consistent with recent findings suggesting that risk may have a more limited influence over the level of pay than previously thought.
Keywords: CEO pay; incentive pay; contract theory; incentive lab
JEL Codes: D81; G30; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| riskier pay packages (J33) | higher pay (J33) |
| variance of pay (J33) | total pay (J33) |
| CEO risk aversion (D81) | higher pay premium (J33) |
| stock grants (G10) | highest pay premium (J33) |
| cash bonuses (J33) | pay premium (G22) |
| option grants (M52) | pay premium (G22) |