The Wages of Sin: Social Norms and CEO Compensation

This study provides evidence of the effects of social norms on CEO compensation in regard to “Sin” stocks – specifically companies involved in alcohol, tobacco and gaming. Consistent with Sin stock CEOs commanding a higher level of pay as compensation for the negative social ramifications of their role, I find that Sin CEOs earn both a higher cash and total compensation package compared with their “Normal” CEO counterparts. In addition, Sin CEOs’ cash compensation is more sensitive to shareholder returns and return on assets. However, Sin CEOs’ cash compensation is less sensitive to negative profit when compared with CEOs of Normal companies. My research confirms that social norms do have a substantive effect on the level and pay performance sensitivity of CEO compensation