Fair value gains and losses in derivatives and CEO compensation

I examine the sensitivity of CEO compensation to fair value gains and losses in derivatives for a sample of U.S. oil and gas producers from 2007 to 2009. I provide evidence I provide evidence that CEO cash compensation, but not equity compensation is sensitive to derivative gains/losses. Further, only the derivative gains/losses reflected in current earnings affect CEO compensation. I find that CEO cash compensation is less sensitive to derivative gains/losses than to other earnings components. However, CEO cash compensation is nearly three times more sensitive to derivative gains than to derivative losses, suggesting that CEOs opportunistically influence compensation committees to reward them for derivative gains but shield their compensation from derivative losses. Finally, I show that the asymmetric treatment of derivative gains/losses in CEO cash compensation decreases in the presence of strong corporate governance.