Shannon Roddel | November 20, 2019
When firms design the initial pay package for a new CEO, they focus on that person’s tolerance or aversion to risk-taking. Research and corporate governance practices generally recommend compensating a risk-averse CEO with more performance-based pay to incentivize risk taking.
Prior research has shown that political affiliation is an indicator of a CEO’s willingness to take risk — liberal CEOs are bigger risk-takers than their conservative counterparts. New research from the University of Notre Dame set out to examine whether conservative CEOs receive more performance-based pay to incentivize them to take more risks for the firm, but instead, they found the opposite is true.
Newly appointed, conservative CEOs who are naturally more risk averse receive less performance-based pay than those who are more willing to take risks, and more liberal CEOs get more performance-based pay, according to “The influence of CEO risk tolerance on initial pay packages,” forthcoming in Strategic Management Journal from Timothy Hubbard, assistant professor of management in Notre Dame’s Mendoza College of Business, along with Scott Graffin and Eric Lee from the University of Georgia and Dane Christensen from the University of Oregon.
It happens, Hubbard explains, through a process of matching (CEOs join firms that compensate the way they prefer) and tailoring (boards tailor pay to the individual CEO).
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