I just read a very interesting paper on executive compensation in "sin" industries. Novak, Jiri, The Social Stigma Premium in Executive Compensation in Sin Firms (July 23, 2014). Available at SSRN: http://ssrn.com/abstract=2470393:
This paper examines the economic costs of violating social norms, by looking at the compensation of executives of ‘sin’ firms – firms whose products are viewed negatively in light of prevailing social norms. We define sin firms as firms involved in the production of alcohol, gambling, and tobacco products. We find a statistically and economically significant premium in the compensation of these firms’ executives. This premium is consistent across several subcategories of compensation, several broadening samples of ‘sin firms’, and is present in all the three examined industries. We find that the premium is unlikely to be spurious. We also find that the premium cannot be fully explained by firms’ physical characteristics, by increased risk in the form of income risk and pay performance sensitivity, or by managerial ability. We find evidence that the premium is more likely to be the result of a ‘stigma’ connected to the negative public perception of sin firms’ activities than the result of specific executive traits valuable only to sin firms. Our results suggest that sin firms pay their executives more to compensate them for taking on this stigma, and this compensation appears unrelated to the characteristics of the work the executives perform. We also find that sin firm executives are less likely to hold outside directorships, and that this and the compensation premium may be related.
But I'm puzzled: Why don't "sin" firms just hire sinners to run their business? Presumably, to cite a couple of obvious examples, Hugh Hefner and Larry Flynt would take a discount to run their respective pron operations relative to what they'd demand to run a more uplifting operation.
This actually strikes me as a serious question. Presumably there are some people who would get utility by embracing the stigma in question. And, if so, wouldn't we expect those persons to be willing to accept a lower pay rate? If not, what does that tell us about the relevance of the ratonal actor model to understanding executive compensation?