Variability in Cashflows and Returns and CEO Pay

Document Type



CEO compensation; risk; cash flow; returns; compensation structure

Identifier Data


The Journal of Theoretical Accounting Research

Publication Source

The Journal of Theoretical Accounting Research Fall 2021


I use a version of the principal-agent model to examine how closely empirical CEO compensation hews to agency theoretic predictions. Assuming a risk averse manager, and an asymptotically risk neutral principal, the Bolton and Dewatripont (2005) model prescribes that the principal should shift compensation more toward cash as volatility in returns increases and toward non-cash, more variable, compensation as volatility in returns declines. I examine these prescriptions in terms of fixed and variable pay and in terms of current and non-current pay. I find support for broad predictions of the model with regard to the pay-performance relation but weaker support with regard to the structure. Specifically, as risk increases, the pay-performance relation decreases, but the variable portion of pay tends to increase with risk contrary to theoretical prediction. I provide alternative explanations for perceived or real inefficiency in CEO compensation.