CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships

The existing literature concludes that executive option-based compensation leads to riskier firm policies, but is ambiguous on whether it improves firm performance. We find that option-based pay significantly undercuts the firm performance through major customer relationships. Following import tariff cuts, which represent exogenous shocks to existing customer relationships, we show that firms with large customers reduce CEO option-based compensation. Further, we find that firm performance improves and customer relationships strengthen following the reduction in CEO option compensation. Overall, this study provides insights into how firms with important stakeholders can shape the costs and benefits of governance practices.