Layoffs and CEO Compensation: Does CEO Power Influence the Relationship?

Abstract

We examine the association between layoffs and CEO compensation. Because of the public scrutiny and political pressures associated with both CEO compensation and layoffs, we expect firms to alter CEO compensation by reducing bonus pay and increasing equity-based compensation as the magnitude of the layoff increases. Consistent with the predicted substitution, we find that as layoffs intensify, CEOs’ bonus compensation decreases and their equity-based compensation increases. When we consider whether these compensation adjustments vary with CEO power, we find that as layoff magnitude increases, relative to less powerful CEOs, more powerful CEOs experience smaller reductions in bonus pay, a lower likelihood of receiving no bonus, and comparable increases equity compensation. Finally, we report evidence that post-layoff market performance of firms led by more powerful CEOs is not superior to that of firms led by less powerful CEOs. Collectively, the results suggest that the preferential compensation arrangements afforded more powerful CEOs is inconsistent with efficient contracting. The combined results are suggestive of the managerial power theory.

Keywords: CEO Compensation, Layoffs, Political Costs

JEL Classification: G34, J33, L50