CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R

Carline, Nicholas F.; Pryshchepa, Oksana; Wang, Bo

doi:10.1017/s0022109023000017

Cited by 3 publications

(1 citation statement)

References 108 publications

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“…Since investment and financial policies are the two key corporate decisions a firm can make, there is increased likelihood that CEOs will increase firm risk by influencing these domains for their own interests. CEOs’ overconfidence and recklessness can manifest through riskier policy choices (Athanasakou et al , 2017; Carline et al , 2023). The first measure of riskier corporate decision is leverage, which captures the riskiness of corporate financing.…”

Section: Introductionmentioning

confidence: 99%

Executive compensation, risk and performance: evidence from the USA

Bouteska,

Sharif,

Abedin

2024

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Purpose Given the serious question raised by the subprime of the 2008 global financial crisis over the rising practices of excessive rewarding of executives in the USA and European firms, the executive pay-performance nexus has emerged as a popular topic of debate in the contemporary corporate finance research. Conducted mostly on the Anglo-Saxon contexts, research outcomes have been inconclusive and dichotomous. Considering this backdrop, this study aims to investigate the endogenous relationship between executive compensation and risk taking in the context of the USA. Design/methodology/approach Using a large sample of non-financial firms from 2010 to 2020 based on panel data and two-stage least square regression. In this study, the riskier corporate decision is measured as book leverage and ratio of R&D expense to total assets. Chief executive officers’ (CEO) experience and age are used as instrumental variables, and these are expected to influence compensation incentives and, hence, affect firm riskiness indirectly. Firm size, return on assets and CEO turnover are reported to affect compensation and corporate decisions, therefore, included as control variables. Given that higher executive compensation is related to riskier corporate decision in firms, this study incorporates total wealth (i.e. accumulated equity related compensation) as an additional proxy of compensation, and this selection is justifiable by the perfect contracting notion of the agency theory. Findings The results of this study show a significant positive and increasing nexus among compensation and riskier corporate decisions. Besides, the compensation level proxied through the percentage of each form of compensation in total compensation is very important as greater equity and greater salary diminishes risk taking. Practical implications The outcomes of this study have useful implications for firm stakeholders and policymakers. Originality/value The level of pay measured by the percentage of each type of compensation in total compensation is of utmost importance as it can increase or decrease risk taking in corporate decisions.

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Section: Introductionmentioning

confidence: 99%

Executive compensation, risk and performance: evidence from the USA

Bouteska,

Sharif,

Abedin

2024

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Bonuses, options, and bank strategies

Razul,

Gomes,

Gulamhussen

2023

SN Bus Econ

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This study focuses on the management financial incentives that banking institutions adopt, with the purpose of best serving their corporate strategies. Specifically, a comparative study is carried out between medium- and long-term incentives, under the form of option-based pay, and short-term incentives, which take the form of bonus-based pay. Banking institutions should seek for the best balance between the two types of compensation, weighing their pros and cons under the specific market conditions they face. The paper advocates in favor of including the options modality in incentive packages, given that it stimulates the alignment of interests between owners and managers, allowing these last ones to act in an independent but responsible manner. Bonuses, in turn, require additional shareholders’ supervision, which might be advantageous when the need to reverse harmful effects of poor performance arises. The developed theoretical model is complemented with two numerical exercises (one with simulated data and the other with real data) that corroborate the model’s conjectures.

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