Does risk matter for executive compensation?

ABSTRACT

PurposeThe purpose of this study is to examine whether chief executive officer (CEOs) are paid for the systematic and/or unsystematic risks and whether there is any optimum risk premium level in the executive pay.Design/methodology/approachFirm and year fixed effect panel data regression was used to estimate the relationship between total CEO compensation and systematic (market) and unsystematic (firm) risks.FindingsThere is no nexus between CEO pay and unsystematic (diversifiable) risk;however, the association between CEO compensation and systematic (undiversifiable) risk is positively significant in line with agency theory. Moreover, it is revealed that this positive relationship has an optimum point (curvilinear).Research limitations/implicationsThis paper contributes to the controversial argument in the literature by investigating the situation in the Swiss market. Switzerland is an exemplary country because of its direct democracy (consensus) structure for executive pay. This study is limited by the fact that only total CEO compensation is analyzed.Practical implicationsAs a practical implication, it is shown that after the optimal point, the higher compensation does not motivate the CEOs to take higher risks and does not provide the organizations with any additional benefit.Originality/valueThe finding of this study supports agency theory’s risk premium assumption and provides additional evidence to the contradictory results in the literature with a new country setting that has paramount importance in executive compensation phenomena. It is a comparative finding with prior literature also outlines the future research area in the risk and compensation literature.