Pay Me Later: Inside Debt and its Role in Managerial Compensation

40 Pages Posted: 3 Nov 2008

See all articles by Rangarajan K. Sundaram

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 2007

Abstract

Many companies pay their executives using inside debt, such as pensions and deferredcompensation. Though these instruments are widely used, their valuation and incentiveeffects for managers have been almost entirely overlooked by prior research. CEO compensation in most firms exhibits a balance between debt and equity based incentives, andthe balance systematically shifts away from equity and toward debt as CEOs grow older.CEOs with high debt-based incentives manage their firms conservatively to reduce defaultrisk. Pension plan compensation strongly influences patterns of CEO turnover and CEOcash compensation.

Suggested Citation

Sundaram, Rangarajan K. and Yermack, David, Pay Me Later: Inside Debt and its Role in Managerial Compensation (May 2007). NYU Working Paper No. FIN-05-002. Available at SSRN: https://ssrn.com/abstract=1294138

Rangarajan K. Sundaram (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

David Yermack

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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