Managerial risk aversion and the structure of executive compensation

Research question/issue We examine how chief executive officers' (CEOs) innate risk aversion influences the size and structure of their compensation contracts. In so doing, we estimate managerial risk aversion based on the Big Five personality traits—openness, conscientiousness, extraversion, a...

Full description

Saved in:
Bibliographic Details
Published in:Corporate governance : an international review 2023-07, Vol.31 (4), p.563-581
Main Authors: Hrazdil, Karel, Kim, Jeong Bon, Novak, Jiri, Zatzick, Christopher
Format: Article
Language:English
Subjects:
Agreeableness
CEO personality
Chief executives
Compensation
Conscientiousness
Contracts
corporate governance
Executive compensation
Extraversion
Five factor model
incentive pay
Neuroticism
Openness
Personality
Personality traits
Risk
risk aversion
Risk factors
Risk preferences
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Research question/issue We examine how chief executive officers' (CEOs) innate risk aversion influences the size and structure of their compensation contracts. In so doing, we estimate managerial risk aversion based on the Big Five personality traits—openness, conscientiousness, extraversion, agreeableness, and neuroticism—inferred using IBM's Personality Insights service. Research findings/insights We provide evidence that executives' inherent risk aversion is related to their compensation structure. Contrary to agency theory predictions, we find that more risk‐averse CEOs receive more cash‐based and less equity‐based compensation but receive lower total compensation. This relationship is moderated by differences in firms' resource advantages. Theoretical/academic implications Despite the theoretical prediction that managerial risk aversion is a key factor determining the structure of executives' compensation contracts, there is limited empirical evidence on whether firms adjust the components of compensation based on CEOs' risk preferences. Our results help us better understand the interplay between CEO personality and executive compensation. Practitioner/policy implications This study offers important implications for organizations in that knowledge about executives' inherent risk aversion is important and relevant for designing effective compensation contracts.
ISSN:0964-8410
1467-8683
DOI:10.1111/corg.12480