The Compensation Premium in the "Sin Industries" of Tobacco, Alcohol and Gambling

This research examines how executive pay can be affected or influenced by social norms and values and particularly how negative perception of an industry can affect that industry's leaders' remuneration. The research looks at three industries - gambling, alcohol and tobacco. As all these products and services are known to have either detrimental effects on health and/or may lead to social problems, the paper refers to them as "sin" industries.

The study proposes that negative public perception of sin industries may stigmatise executives. Working for a tobacco company, for example, may impinge on an executive's social status. It may also limit their opportunities to earn from lucrative outside appointments, or lessen the likelihood they will receive invitations to sit on boards of other firms. Therefore we may expect managers in sin industries to demand a premium to compensate for the consequences their association with sin industries may have on their personal and professional life. The paper presents evidence to corroborate this. Indeed the research shows that an executive in any of the sin industries can expect to earn $331,300 more in annual inflation-adjusted income, compared to non-sin industry executives. The premium is paid to both CEOs and other executives, and is present in all components of total remuneration (salary, bonus and equity-based compensation). We believe this is the first study to examine how negative social perception of the nature of economic activities in a firm can affect executive compensation.

This study offers an important contribution to the literature on the determinants of executive compensation as well as to the literature on the impact of social norms on economic activities. The complete working paper is available for download below.