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This paper studies whether managers take social reputation into account when they negotiate compensation contracts with their hiring firms. We argue that managers working in sin industries are vulnerable to reputation loss due to the negative social norm and thereby are offered higher pays as the compensation. We provide a theoretical prediction and confirm it with empirical evidence. We define sin companies as those operating in the industries of alcohol, gambling, and tobacco, and show that sin-company managers, compared with their peers in non-sin companies, receive about 0.65 million dollars more annually in total compensation, which represents about 24% premium in pay. Moreover, there is also greater asymmetry in the pay-for-performance sensitivity for sin industry firms – sin-company managers experience larger pay increases upon positive performances, but smaller pay reductions upon negative performances. Lastly, we show that the pay premium received by sin-company managers is particularly large when the company is located in a religious area, consistent with the notion that such pay premium compensates for the negative social reputation.
JEL Classification: G31; G32; G34; J30
Keywords: Reputation; Executive compensation; Sin company