The Role of Risk in Executive Compensation

The present study was designed to investigate the role of risk in executive compensation. We argue that compensation arrangements may be used to mitigate agency problems by encouraging risk taking behavior and providing incentives for optimizing long-term performance. We examine total compensation, compensation risk, and compensation time horizon. Consistent with our theory, the evidence indicates that these dimensions vary with the financial and strategic context of the firm and with the risk-taking propensity of the CEO.