USA 
United KingdomDr. Monika Tarsalewska
Deputy Director of the Exeter Sustainable Finance Centre, University of Exeter Business School
A recent study has drawn a clear link between how CEOs get paid and the risks companies take - with some surprising consequences for employee welfare and corporate accountability...
Dr. Monika Tarsalewska
Deputy Director of the Exeter Sustainable Finance Centre, University of Exeter Business School
A recent study has drawn a clear link between how CEOs get paid and the risks companies take - with some surprising consequences for employee welfare and corporate accountability...
A recent study has drawn a clear link between how CEOs get paid and the risks companies take - with some surprising consequences for employee welfare and corporate accountability.
The research, published in The Accounting Review, shows that workplace misconduct is more common in firms where CEOs are heavily rewarded with stock options. Turns out, giving CEOs incentives that encourage risk-taking can also lead to more violations of health and safety standards, labor laws, and other forms of workplace misconduct. Who knew?
"Stock option incentives can influence investment and financial decision-making, encouraging CEOs to pursue riskier projects and financing strategies," explains Dr. Monika Tarsalewska, Deputy Director of the Exeter Sustainable Finance Centre at the University of Exeter Business School.
"However, they can also drive managers to engage in other risky practices, such as accounting manipulation and fraud.”
The economic impact is huge. According to the International Labour Organization (ILO), workplace misconduct costs businesses and society around $2.8trillion each year (about 4% of global GDP) through medical expenses, compensation, and legal costs.
Digging into the data
The study, conducted by Dr. Tarsalewska alongside Dr. Justin Chircop (Lancaster University) and Dr. Agnieszka Trzeciakiewicz (University of York), examined data from over 40 US federal regulatory agencies and the Department of Justice.
Using the Violation Tracker tool, they analyzed workplace violations across 2,000 firms between 2000 and 2018, comparing those results with CEO pay structures and company characteristics.
Stock option incentives can influence investment and financial decision-making, encouraging CEOs to pursue riskier projects and financing strategies. However, they can also drive managers to engage in other risky practices, such as accounting manipulation and fraud
Guess what they found? An increase in ‘CEO Vega’. For the uninitiated that’s not a business trip to Sin City, it’s a finance term measuring how much a CEO's wealth shifts with stock volatility and is linked to a 6.7% rise in workplace violations and a 5.5% jump in related penalties. In other words, when CEO incentives lean heavily on risky stock options, workplace problems tend to follow.
Regulatory shifts and risk reduction
The study also highlights a regulatory shift that helped curb some of these risks. The 2005 Statement of Financial Accounting Standard (SFAS) 123R required firms to account for share-based payments in their income statements. The move discouraged overuse of stock options in executive pay and ultimately led to fewer workplace violations.
"This regulatory change made a significant difference," says Tarsalewska. "It reduced the prominence of stock options in CEO compensation, which in turn contributed to improved workplace safety and compliance.”
Impact on employees
The study defines workplace misconduct as violations tied to health and safety, labor laws, and practices that exploit labor. The link to CEO incentives suggests these issues are not just isolated events, they stem from deliberate decisions aimed at improving financial performance.
"Managers who are under pressure to perform often adopt practices intended to boost firm profitability, but these can come at a cost of workforce safety and wellbeing," Tarsalewska adds.
Companies with higher CEO vega levels were found to cut costs by increasing workloads and scaling back safety measures, directly impacting employee welfare.
“Workplace misconduct isn’t just about bad behavior, it's often a by-product of strategies designed to meet short-term financial goals,” Tarsalewska adds. “When firms cut discretionary expenses, reduce safety protocols, or push employees harder, we see an uptick in misconduct.”
Not just a finance problem
While risk-taking behavior is often associated with the financial sector, the study excluded financial and utility firms to ensure its findings applied more broadly. The results show that CEO vega-driven risks extend across various industries, reinforcing the fact that it is a wider corporate concern.
What's next for CEO pay? The research suggests that while regulatory changes like SFAS 123R have already helped, further reforms may be needed to curb risk-heavy incentives.
"If additional regulations targeting stock option practices are introduced, firms may adjust CEO incentives to prioritize stable growth rather than aggressive risk-taking," Tarsalewska notes.
The findings point to a need for companies to rethink executive pay. Shifting incentives away from high-risk strategies and adding employee welfare metrics into performance goals could help firms reduce workplace misconduct without sacrificing growth.
"Ultimately, balancing CEO incentives with long-term stability and workforce wellbeing is key," says Dr. Tarsalewska. "The right compensation model can still encourage growth without putting employees at risk."
