M-RCBG Associate Working Paper No. 178

The Million Dollar Rule, Executive Compensation, and Managerial Risk-Taking

R. Jared DeLisle
Aspen Gorry
Cody Kallen
Aparna Mathur



This paper provides novel causal evidence of the impact of changes in the structure of managerial compensation on the riskiness of firm investment and debt policy. We exploit variation in the structure of CEO compensation that is induced by tax policy rules that eliminated corporate tax deductibility of non-incentive-based compensation exceeding $1 million. While not influencing the overall level of compensation, these rules made the pay structure for affected CEOs riskier by increasing the share of stock options and other incentive-based pay. We find that higher sensitivity of CEO wealth to stock return volatility (“vega”), generates an increase in R&D investment, a reduction in business segments, a reduction in the Herfindahl index of sales across segments, and an increase in idiosyncratic firm risk. Overall, our estimates are smaller in magnitude than those found in previous literature.

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