This section explores the effect of CEO compensation on firm risk. We have noted in Section I that the effect of an increase in firm risk on CEO’s wealth depends on how much of this wealth comes from stock options relative to other forms of compensation such as salary and stock holdings. For a CEO who cares about percentage changes in wealth rather than absolute changes in wealth, we can measure this effect through the total CEO wealth elasticity with respect to stock volatility. This variable captures the effect of volatility changes on the total wealth of the CEO, and not only on the value.
