The Executive Turnover Risk Premium
62 Pages Posted: 5 Jun 2008 Last revised: 12 Oct 2014
Date Written: September 13, 2013
We establish that CEOs of companies experiencing volatile industry conditions are more likely to be dismissed. At the same time, industry risk is, accounting for various other factors, unlikely to be associated with CEO compensation other than through dismissal risk. Using this identification strategy, we document that CEO turnover risk is significantly positively associated with compensation. This finding is important because job-risk compensating wage differentials arise naturally in competitive labor markets. By contrast, the evidence rejects an entrenchment model according to which powerful CEOs have lower job risk and at the same time secure higher compensation.
Keywords: Executive compensation, entrenchment, turnover, corporate governance
JEL Classification: D8, G34, M52
Suggested Citation: Suggested Citation