CEO Pensions: Disclosure, Managerial Power, and Optimal Contracting

Abstract

CEOs often receive pensions that provide life annuities of up to 60% of their final salary plus bonus. I investigate the extent to which pensions are managerial rent extraction and/or the result of optimal contracting between CEOs and boards of directors. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits and whether pensions are associated with CEO power and/or contracting determinants. Overall, my results provide some support for both the managerial power and optimal contracting views of pensions. Economic contracting variables, however, appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used to extract rents, this practice appears to be limited. In addition, my results suggest that pension-based rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors' ability to value pensions.

JEL Classification: M41, M45, K22, G18, G34, J33