Risk Aversion in CEO Compensation

Authors

Brandon Bates, Brigham Young University
Dr. Richard Butler, Brigham Young University

Keywords

risk aversion, CEO, stock, equity risk, performance

College

Family, Home, and Social Sciences

Department

Economics

Abstract

Chief executive compensation is a topic of great interest for the general public. Such widespread fascination with the topic likely stems from a predilection for subjects involving extravagance and luxury. Of course, CEO compensation holds an additional dimension of interest for economists. That the CEO does not own the company he runs provides a classic example of the principal agent problem. In this application of the principal agent framework, if the compensation committee were to pay a CEO exclusively with a base salary, the executive would have an incentive to shirk or maintain the status quo. Offering a mixture of base salary and performance pay gives the chief executive officer a vested interest in company performance.

Recommended Citation

Bates, Brandon and Butler, Dr. Richard (2013) "Risk Aversion in CEO Compensation," Journal of Undergraduate Research: Vol. 2013: Iss. 1, Article 174.
Available at: https://scholarsarchive.byu.edu/jur/vol2013/iss1/174