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
There are 3 versions of this paper
How Large Is the Pay Premium From Executive Incentive Compensation?
How Large Is the Pay Premium From Executive Incentive Compensation?
Are CEOS Paid Extra for Riskier Pay Packages?
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: Suggested Citation