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Article
Publication date: 7 June 2011

Martin Larraza‐Kintana, Luis R. Gomez‐Mejia and Robert M. Wiseman

This paper seeks to analyze how compensation framing influences the risk‐taking behavior of the firm's chief executive officer (CEO), and the mediating role played by risk bearing.

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Abstract

Purpose

This paper seeks to analyze how compensation framing influences the risk‐taking behavior of the firm's chief executive officer (CEO), and the mediating role played by risk bearing.

Design/methodology/approach

The study employs a sample of 108 US firms that issued an initial public offering in 1993, 1994 and 1995. Data from a survey filled out by the CEO of the firm are completed with secondary information. A structural equation model is estimated which explicitly considers the mediating effect of risk bearing on the compensation framing‐risk taking relationship.

Findings

The analyses indicate that while the performance targets included in the CEO's compensation contract indirectly influence the riskiness of the CEO's strategic decisions through its influence on the employment risk component of executive risk bearing, the level of compensation relative to peers does not. It shows that not all reference points are equally relevant in determining the CEO's willingness to take risk, nor do all the elements of risk bearing play the same role in that partial mediation.

Research limitations/implications

The paper provides a refinement of previous work on modelling the risk‐taking behavior of managers.

Practical implications

The paper provides a guideline to think about the behavioral consequences of the pay level in the market for executives and the performance targets included in the compensation contracts.

Originality/value

The paper proposes and tests a model on how different reference points used to frame compensation influence CEO risk taking. It also provides the first test of a central proposition of the behavioral agency model: risk bearing partially mediates the influence of compensation framing on risk taking.

Details

Management Research: Journal of the Iberoamerican Academy of Management, vol. 9 no. 1
Type: Research Article
ISSN: 1536-5433

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