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How large is the pay premium from executive incentive compensation?

Author

Listed:
  • Albuquerque, Rui
  • Albuquerque, Ana
  • Carter, Mary Ellen
  • Dong, Flora

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 15% 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 effect over the level of pay than previously thought.

Suggested Citation

  • Albuquerque, Rui & Albuquerque, Ana & Carter, Mary Ellen & Dong, Flora, 2020. "How large is the pay premium from executive incentive compensation?," CEPR Discussion Papers 15243, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15243
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    Cited by:

    1. Edmans, Alex & Gosling, Tom & Jenter, Dirk, 2023. "CEO compensation: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 150(3).

    More about this item

    Keywords

    Ceo pay; Incentive pay; Contract theory; Incentive lab;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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