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Explaining the structure of CEO incentive pay with decreasing relative risk aversion

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  • Chaigneau, Pierre

Abstract

It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if preferences with constant relative risk aversion are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.

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  • Chaigneau, Pierre, 2013. "Explaining the structure of CEO incentive pay with decreasing relative risk aversion," Journal of Economics and Business, Elsevier, vol. 67(C), pages 4-23.
    • Handle: RePEc:eee:jebusi:v:67:y:2013:i:c:p:4-23
    DOI: 10.1016/j.jeconbus.2012.10.002
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    Cited by:

    1. Pierre Chaigneau, 2012. "The effect of risk preferences on the valuation and incentives of compensation contracts," FMG Discussion Papers dp697, Financial Markets Group.
    2. repec:oup:rfinst:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    3. Pierre Chaigneau, 2012. "The Effect of Risk Preferences on the Valuation and Incentives of Compensation Contracts," Cahiers de recherche 1209, CIRPEE.
    4. Ingolf Dittmann & Ko-Chia Yu & Dan Zhang, 2017. "How Important Are Risk-Taking Incentives in Executive Compensation?," Review of Finance, European Finance Association, vol. 21(5), pages 1805-1846.
    5. Tobias Huber & Johannes G. Jaspersen & Andreas Richter & Dennis Strümpel, 2023. "On the change of risk aversion in wealth: a field experiment in a closed economic system," Experimental Economics, Springer;Economic Science Association, vol. 26(1), pages 1-26, March.
    6. Dilip B. Madan & King Wang, 2024. "On the real rate of interest in a closed economy," Annals of Finance, Springer, vol. 20(4), pages 459-477, December.

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    More about this item

    Keywords

    CEO pay; Principal-agent model; Corporate governance; Decreasing relative risk aversion; Stock-options;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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