Abstract While research has analyzed how the structure of incentive pay relates to the dispersion of the performance measure distribution, as measured by its variance or volatility, we examine how it relates to the asymmetry of the distribution, as measured by its skewness. In contrast to the variance, skewness affects the relative informativeness of high and low performance about the agent's effort, which determines the relative efficiency of providing rewards and punishments for incentive purposes. Therefore, skewness is an important determinant of compensation convexity, which is determined by the relative holdings of stock and options. Consistent with our analytical and numerical results, we find that the skewness of expected earnings is negatively associated with the convexity of CEO compensation. Our results are economically significant, robust to alternative specifications, and do not appear to be driven by reverse causality. In addition, we find that earnings skewness is negatively associated with total CEO compensation and that this association is driven by lower options‐based compensation. These findings are consistent with CEOs preferring positively skewed performance metrics. Overall, we provide theoretical, numerical, and empirical evidence suggesting that skewness is a more important determinant of the convexity and structure of CEO compensation than volatility.

ABSTRACT We evaluate whether reported accounting numbers are informative about earnings uncertainty and whether earnings uncertainty is priced. We use quantile regressions to forecast the standard deviation, skewness, and kurtosis of future earnings. These three moments are important measures of earnings uncertainty because they reflect the size of the average deviation from expected earnings and the amount of extreme upside potential, extreme downside risk, or both. We develop a novel approach for evaluating the reliability of our forecasts and we show that they are reliable. We also document that: (1) equity prices are increasing (decreasing) in the standard deviation and skewness (kurtosis) of lead return on equity and (2) credit spreads are increasing (decreasing) in the standard deviation and kurtosis (skewness) of lead return on assets. Our results indicate that historical financial statements are informative about earnings uncertainty and that earnings uncertainty is priced. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: C21; C53; G17; M41.