Hedging Executive Compensation Risk Through Investment Banks
Allowing CEOs to hedge the risk in the compensation contracts their firms give them has been controversial because such hedging allows the executives to undo some of the incentive effects of those contracts; it also results in a divergence between the compensation firms pay their senior executives and the compensation those executives effectively receive. We analyze these personal hedging activities of CEOs and identify when firms may gain or lose by allowing or prohibiting such hedging. We also describe variations in CEOs' demands for various compensation hedges, and how firms will restructure their CEOs' compensation contracts in anticipation that the CEOs will engage in such hedging.
Dye, Ronald A. and Swaminathan Sridharan. 2016. Hedging Executive Compensation Risk Through Investment Banks. The Accounting Review. 91(4): 1109-1138.