Undermining incentives: CEO reactions to compensation rebalancing

John S. Marsh () and Rachel Graefe-Anderson ()
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John S. Marsh: University of Mary Washington
Rachel Graefe-Anderson: University of Mary Washington

Journal of Management & Governance, 2018, vol. 22, issue 2, No 6, 365-391

Abstract: Abstract Directors commonly “punish” CEOs for overly risky behavior by rebalancing their compensation to include more restricted stock and fewer stock options. This paper extends the behavioral-agency model to describe how CEOs will manage their holdings of stock and stock options in response to this form of compensation rebalancing. In doing so, it finds that CEOs respond by selling existing stock holdings and accumulating option holdings. This behavior achieves the opposite incentive structure that such rebalancing intends to create, raising questions about the effectiveness of compensation rebalancing in reducing risky decision making.

Keywords: Behavioral agency theory; Stock options; Executive compensation; Corporate governance; Risk-taking (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10997-017-9391-7

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