Labor Unemployment Risk and CEO Incentive Compensation.

This article examines how changes in unemployment risk for rank-and-file workers influence chief executive officers' (CEOs') risk-taking incentives through adjustments in executive compensation. Using state-level variations in unemployment insurance (UI) benefits as an exogenous proxy for workers' unemployment risk, the study finds that more generous UI benefits lead boards of directors to increase the convexity of CEO pay—measured by "flow vega," the sensitivity of CEO wealth to stock return volatility—primarily through greater stock option grants. This effect is stronger in firms with more independent and gender-diverse boards, greater long-term institutional ownership, and in labor- or human-capital-intensive industries. A difference-in-differences analysis supports a causal interpretation, and instrumental variable regressions show that increased CEO vega induces greater corporate risk-taking, including higher leverage, R&D investment, and cash flow volatility. Overall, the findings suggest that boards internalize workers' unemployment risk when designing managerial incentives to align executive risk-taking with shareholder value while considering labor market frictions.