Managerial risk aversion and the structure of executive compensation

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

4 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)563-581
Journal / PublicationCorporate Governance: An International Review
Volume31
Issue number4
Online published24 Jul 2022
Publication statusPublished - Jul 2023

Abstract

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.

Research Area(s)

  • CEO personality, corporate governance, executive compensation, incentive pay, risk aversion

Citation Format(s)

Managerial risk aversion and the structure of executive compensation. / Hrazdil, Karel; Kim, Jeong Bon; Novak, Jiri et al.
In: Corporate Governance: An International Review, Vol. 31, No. 4, 07.2023, p. 563-581.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review