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

46 Pages Posted: 13 Sep 2007 Last revised: 2 Nov 2011

Belinda Charlene Henderson

Mississippi State University - School of Accountancy

Adi Masli

University of Arkansas - Sam M. Walton College of Business

Vernon J. Richardson

University of Arkansas at Fayetteville; International Business School Suzhou, XJTLU

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: March 18, 2010

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

Suggested Citation

Henderson, Charlene and Masli, Adi and Richardson, Vernon J. and Sanchez, Juan Manuel, Layoffs and CEO Compensation: Does CEO Power Influence the Relationship? (March 18, 2010). The Journal of Accounting, Auditing and Finance, Vol. 25, No. 4, pp. 673-707, 2010 . Available at SSRN: https://ssrn.com/abstract=1014281

Belinda Charlene Henderson

Mississippi State University - School of Accountancy ( email )

Mississippi State, MS 39762
United States

Adi Masli

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Vernon J. Richardson

University of Arkansas at Fayetteville ( email )

401 WCOB
Fayetteville, AR 72701
United States

International Business School Suzhou, XJTLU ( email )

26 Xianning W Rd.
Dushu Lake Higher Education Town
Suzhou, Jiangsu Province 215123
China

Juan Manuel Sanchez (Contact Author)

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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