Pay Me Later: Inside Debt and its Role in Managerial Compensation
40 Pages Posted: 3 Nov 2008
Date Written: May 2007
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.
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