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Boards can manipulate risk taking behaviour through CEO pay

New US research suggests companies can vary their executive pay strategy to control risk-taking behaviour.

The study found often more than half of a CEOs pay package consists of company stocks. Hence, they are encouraged to take risky measures to increase the stock price.

The findings suggest companies after rapid growth should pay their CEO large amounts of potential income. This will encourage risk taking in a bid to increase share price. Companies that favour low-risk behaviour should pay CEOs larger immediate funds and lower potential amounts.

The report proposes a ‘2 to 1’ - twice as much prospective wealth as current wealth - benchmark will encourage safe, value-enhancing risks.

The study will appear in the October issue of the Harvard Business Review.

Read more at Michigan State University

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