The Wages of Sin - Social Stigma Premium in Executive Compensation

Abstract

We document a significant premium of about 30 per cent in executive compensation in ‘sin’ industries (alcohol, gambling, and tobacco) that is not explained by standard compensation predictors such as higher managerial skill required in sin industries, higher risk of employment contracts, executive entrenchment, or a higher need for political capital at sin firms. Rather, the premium compensates for costs executives bear due to social ‘stigma’ related to work in industries perceived negatively in light of social norms. Correspondingly, the premium increases with social aversion to sin activities and reduces as firms offset negative social perception with image building. Further, to illustrate the type of costs executives in sin industries bear, we show that (1) sin firm executives are less likely to serve as directors on other boards, particularly at more esteemed firms, which suggests they enjoy lower social status, and (2) CEOs from sin firms are less likely to find employment within five years of leaving a sin firm, and if they do, it is at smaller, less prestigious firms. Our results highlight the significant impact violating social norms has on executive compensation contracts.

Keywords: executive compensation, sin firms, social norms

JEL Classification: G11, D71