Firm Risk Taking versus CEO Diversification : Evidence from Outsourcing Firms

I examine CEO compensation in outsourcing firms, using a new database of purchase obligations from firm 10-Ks. I find that the intensity of outsourcing can significantly explain the variations in CEO compensation; the more the firms do outsourcing, the more they pay to their CEOs. Outsourcing firms promote managerial risk-taking by using proportionally more equity-based compensation. However, they also need to compensate additionally their CEOs for the higher risk exposure to the firms' increased total risks. I show that outsourcing firms determine their compensation level and structure based on this optimal trade-off