Risk is a natural component of business management. However, the degree to which top decision-makers embrace risk can be a problem for board members. More importantly, new research suggests risky behavior may be tied directly to an executive's compensation package.
According to researchers at Washington University in St. Louis, the amount of stock options allotted to a CEO can lead to increased risk-taking among company leaders. Specifically, professors studied the way executives handled the prospect of implementing a potential carcinogenic chemical into their operations and how that related to cash flow risk. Todd Milbourn, a finance professor at the Olin Business School, found a link between stock benefits and how executives react to market shocks, disruptive product innovations, international trade barriers, credit decisions
and government regulation. "When this kind of thing happens, a company's legal fees, damage payments and insurance premiums can skyrocket," Milbourn said in a statement. "It can also lead to future workplace safety regulations than can be very costly to implement. Spending all of that money can increase the likelihood of poor company performance." To curb such behaviour, board members may consider more rigid or controlled CEO benefits packages.