CEO option pay, risk taking, and firm performance: An examination of the moderating effects of firm governance structure, strategy, and environment

The ever-increasing levels of executive compensation in North America have attracted the growing attention of researchers, policy makers, and the general public. This dissertation reviews the literature on executive compensation and proposes two theoretical models that seek to explain the relationship between CEO option pay, firm risk and performance. Prior empirical research has failed to produce consistent relationships between executive compensation and firm performance. This dissertation opens the "black box" between executive compensation and firm performance and empirically tests the intervening effect of risk-taking behavior on this relationship. It also examines the moderating effects of firm governance systems, strategy and the environment on the relationship between CEO option pay and risk taking.; The population for this study is U.S. publicly-traded manufacturing companies. A sample of 204 companies were drawn from the Fortune 1000 for testing the hypothesized relationships. Data were retrieved from various archival sources including Compustat, ExecuComp, Mergent Online, Census for Manufacturing, Thompson Financial, and Value line databases. The dissertation uses both mediated hierarchical regression analyses and moderated hierarchical regression analyses to test the hypothesized relationships suggested in the first and second models, respectively.; Results reveal a strong, positive relationship between CEO option pay and a firm's strategic risk, stock returns risk, and income stream risk. Results also showed that firm strategic risk, measured by R&D expenditure, mediates the CEO option pay-firm performance relationship, either fully or partially, depending on which type of performance is being examined. Further, a moderating effect is unveiled for CEO duality, insider ownership, and firm strategy. However, empirical analyses fail to provide adequate evidence to support the expected moderating effect of board independence, institutional and blockholder ownership, and environment.