How Large Is the Pay Premium From Executive Incentive Compensation?

European Corporate Governance Institute – Finance Working Paper 697/2020

56 Pages Posted: 13 Aug 2018 Last revised: 20 Mar 2024

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

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; European Corporate Governance Institute (ECGI)

Qi (Flora) Dong

Kennesaw State University

Multiple version iconThere are 3 versions of this paper

Date Written: February 14, 2024

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, volatility of pay premium, incentive pay, contract theory, Incentive Lab

JEL Classification: D81, G30, J33

Suggested Citation

Albuquerque, Ana M. and Albuquerque, Rui A. and Carter, Mary Ellen and Dong, Qi (Flora), How Large Is the Pay Premium From Executive Incentive Compensation? (February 14, 2024). 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

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

European Corporate Governance Institute (ECGI) ( email )

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

Qi (Flora) Dong

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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