STOCK-OPTION-BASED EXECUTIVE COMPENSATION PLANS AND LODGING FIRMS’ RISK-TAKING

Ming-Che Chien; Min-Ming Wen; Charles Yang

doi:10.26215/tourismos.v8i3.376

Ming-Che Chien

Associate Professor at National Taipei University, Department of Economics, 151, University Rd., San Shia District, New Taipei City, 23741 Taiwan.

Min-Ming Wen

Assistant Professor at California State University, Department of Finance, Los Angeles, CA 90032 United States.

Charles C. Yang

Associate Professor at Florida Atlantic University, Department of Finance, 777 Glades Road, Boca Raton, FL33431.

Keywords

Option-based compensation, risk, executive compensation, compensation structure, lodging industry

Abstract

This study investigates the impact of stock-option-based (SOB) executive compensation by lodging industry firms on risk-taking, and whether or not perceptions of the risk firms face affects the design of CEOs’ compensation contracts. The data analyzed include market-based risk measures and executive compensation for 98 firms over the period from 1992 to 2005 (totaling 734 firm- CEO observations). The study examines research questions by using three-stage least squares in estimating a two-equation simultaneous equation system, in which both firm’s risks and compensation structures are endogenous. Risk is measured by total risk and idiosyncratic risk. Results show that contracts with large versus small bonus-option components induce risk-taking and in addition, perceptions of firms’ risk do substantially impact the design of compensation contracts.

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