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Why CEO option compensation can be a bad option for shareholders: Evidence from major customer relationships

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  • Liu, Claire
  • Masulis, Ronald W.
  • Stanfield, Jared

Abstract

We study how the existence of important production contracts affects the choice of chief executive officer (CEO) compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions as exogenous shocks to customer relationships, we find that firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts is associated with significant declines in these relationships and supplier firm performance. Our study provides new insights into how important stakeholders shape executive compensation decisions.

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  • Liu, Claire & Masulis, Ronald W. & Stanfield, Jared, 2021. "Why CEO option compensation can be a bad option for shareholders: Evidence from major customer relationships," Journal of Financial Economics, Elsevier, vol. 142(1), pages 453-481.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:1:p:453-481
    DOI: 10.1016/j.jfineco.2021.06.034
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    More about this item

    Keywords

    Compensation; Firm performance; Product market; Risk taking; Supply chain;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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