Does CEO Compensation Encourage Risk-Taking? Empirical Evidence from FTSE350.

This thesis investigates the effect of CEOs remuneration components on company risk-taking activities. The primary aim of this study is to provide a better understanding of the link between the Chief Executive Officers' (CEOs) compensation packages and their effects on the company volatility. Hence, this study enhances the understanding within the CEO pay-risk field and form a foundation for a more effective monetary system. We employed panel data from 2012-2017 of the top 350 companies listed as a part of the FTSE index. We performed empirical analysis using random effect, generalized linear model (GLM), generalized method of moments (GMM), and Robust panel regression. We find that performance-related compensation reduces corporate risk-taking. We also find that based (fixed) salary has a significant and positive effect on the company risk measured as volatility. Further analysis shows that total compensation reduces company risk-taking. This implies that the CEO with a fixed salary will increase the company risk. Finally, we find that corporate governance impacts corporate risk-taking, with the majority of them negatively affecting the risk level. Hence, a higher proportion of Independent Directors; Women on Board; longer CEO Tenure; higher Expenses per Employee and larger Board Size the lower the company risk. The overall results provide an incremental contribution to the agency theory literature and existing corporate governance regulations. The thesis differs from existing studies as we investigate the problem from micro and macro level with a full set of CEO compensation elements. The findings of the study have implications for policy makers concerning the recommendations by Turnbull Report and Combined Code. Therefore, in contrast to the previous regulations, the results advise less link to the performance-related elements and a higher salary for the governance board. This research provides strong evidence that CEO compensation packages could be used to correct the executives' risky behaviour. Hence, redesigning the compensation packages according to the study recommendation can increase the CEO's willingness to take the risk. Including a higher proportion of fixed compensation, shareholders can create a better link between their wealth and agents and motivate CEOs to increase the company risk if requested.

Name dc:type.qualificationname

PhD

Level dc:type.qualificationlevel

Doctoral

Grantor dc:publisher.institution

De Montfort University

Year dc:date.issued

2021

Author dc:creator

• Jaskowiec, Katarzyna

Licence

• https://dora.dmu.ac.uk/bitstreams/cb97b5f3-b1cb-40a7-bb5b-ff833fada3d5/download