Pay for Performance: Environmental Disasters and Accounting Scandals

We explore the relationship between equity compensation and the failure of risky projects, …nding a non-monotonic relationship. However, for those settings where failures are high-stakes— e.g., environmental disasters and accounting scandals— the relationship is positive. We test these predictions for environmental and accounting failures of large US …rms from 1996 through 2011 and …nd that changing CEO equity compensation from 100% stocks to 100% options can increases law breaking and incidence rates 40-80% and the magnitude of failure by over 100%. The e¤ectiveness of policies such as Sarbanes-Oxley and FAS123R are also analyzed. Keywords: pay for performance, corporate governance, risk taking, environmental law, accounting I would like to thank Jennifer Brown, Georgy Egorov, Mitchell Ho¤man, David Matsa and Max Schanzenbach for their helpful comments. Also thanked are the participants at the Institutions and Innovation conference at Harvard Business School and seminar participants at the Kellogg School of Management. I thank Jared Petravicius for his excellent research assistance and the Ford Center for Global Citizenship for …nancial support of the project.