Why CEO option compensation can be a bad option for shareholders: Evidence from major customer relationships *

We study how the existence of important production contracts affects the choice of chief executive officer (CEO) compensation contracts. We hypothesize that having major cus-tomers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions as exogenous shocks to customer relationships, we find that firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts is associated with significant declines in these relationships and supplier firm performance. Our study provides new insights into how important stakeholders shape executive compensation decisions. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

The study examines how important production contracts affect the choice of CEO compensation contracts, finding that firms with major customers tend to reduce CEO option-based compensation. Continued high option compensation following tariff cuts is associated with significant declines in customer relationships and supplier firm performance.