Cadman (2013) finds empirically that in response to a CEO divestiture of ownership, boards impose higher compensation risk on CEOs via a higher magnitude of equity grants that are also a higher proportion of annual compensation. The intuition is that by divesting, the CEO diversifies personal wealth risk, which enables boards to impose more risk via variable compensation, over and above what conventional economic determinants would predict. The study highlights the difficulties associated with connecting conventional agency theory to standard empirical tests of the economic determinants of compensation and the importance of measurement in understanding personal wealth diversification. The study also has implications for tests of cross-sectional differences in the pay-for-performance relation associated with CEO divestitures.

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