The Influence of CEO Risk Tolerance on Initial Pay Packages and Strategic Change

We explore whether new CEOs receive initial pay packages that a) align with their risk preferences or b) are calibrated to offset their natural tendencies. Specifically, we examine the initial pay structures of CEOs in relation to their relative risk tolerance, which we measure using a CEO’s political orientation, and find that more conservative-leaning CEOs receive less performance-based pay than their more liberal-leaning counterparts. Supplemental analyses indicate that both a matching and adjustment process appear to occur, whereby boards offer similar pay packages from CEO-to-CEO, but modify them based on differences in risk tolerances. Moreover, our results suggest that a CEO’s relative risk tolerance also influences the relationship between performance-based pay and strategic change. Liberal CEOs are more sensitive to performance-based pay, while conservative CEOs are relatively intolerant to pay mix. Overall, these findings suggest that contrary to typical recommendations based on agency theory, C...