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Labor Unemployment Risk and CEO Incentive Compensation

Author

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  • Andrew Ellul

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405; Center for Economic and Policy Research, London EC1V 0DX, United Kingdom; Centre for Studies in Economics and Finance, 80126 Napoli, Italy; European Corporate Governance Institute, 1000 Brussels, Belgium)

  • Cong Wang

    (School of Management and Economics, CUHK Business School, The Chinese University of Hong Kong, Shenzhen 518172, China)

  • Kuo Zhang

    (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai 200030, China)

Abstract

Unemployment risk influences workers’ incentives to invest in firm-specific human capital. This paper investigates the impact of unemployment risk on chief executive officers (CEOs)’ risk-taking incentive compensation. Exploiting state-level changes in unemployment benefits, we find that after unemployment insurance benefits become more generous, boards increase the convex payoff structure of CEO pay to encourage risk taking. The increase in CEOs’ convexity payoff is stronger in firms with more independent and diverse boards, higher ownership of long-term shareholders, and in industries requiring highly skilled labor. Our findings suggest that boards internalize workers’ interests in firms’ risk-taking decisions and executive compensation is one mechanism used.

Suggested Citation

  • Andrew Ellul & Cong Wang & Kuo Zhang, 2024. "Labor Unemployment Risk and CEO Incentive Compensation," Management Science, INFORMS, vol. 70(2), pages 885-906, February.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:2:p:885-906
    DOI: 10.1287/mnsc.2023.4714
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    References listed on IDEAS

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