Disentangling compensation and employment risks using the behavioral agency model

Abstract

Employing survey and archival data from a sample of IPO firms, and extending the ideas of the Behavioral Agency Model, this study examines the influence of various forms of risk bearing created within the compensation contract on perceived risk taking. The results show that employment risk and variability in compensation each corresponds to greater risk taking, while downside risk and the intrinsic value of stock options correspond to lower risk taking. Among the implications from these results are the importance CEOs attach to relatively stable forms of pay, and to drawing distinctions between the potential for loss of pay and uncertainty about the amount of future pay. Copyright © 2007 John Wiley & Sons, Ltd.