The impact of risk and monitoring on CEO equity incentives

This paper uses a novel empirical setting to explore the association between a firm’s operational risk, managerial monitoring costs, and the level of CEO equity incentives. We investigate a sample of supplier firms that rely on a few large customers for the bulk of their revenues. We predict that supplier firms with higher customer concentration face both higher exogenous idiosyncratic risk and lower monitoring costs and, as a result, will rely less on equity-based managerial incentive compensation contracts. Our empirical results support this prediction. JEL classification: G30; D81; M40