Contractual Versus Actual Severance Pay Following CEO Departure

41 Pages Posted: 11 Mar 2010 Last revised: 12 May 2014

See all articles by Peggy Huang

Peggy Huang

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 5, 2010

Abstract

Using hand-collected data, we document the details of the ex-ante severance contract and the ex-post separation pay given to S&P500 CEOs upon departing from their company. We analyze what are the determinants of whether or not a departing CEO receives separation pay in excess of her severance contract. This excess separation pay is on average, $8 million, which amounts to close to 242% of a CEOs’ annual compensation. We investigate several potential explanations for this phenomenon and find evidence that in voluntary CEO departures, excess separation pay represents a governance problem. In contrast, we find evidence that in forced departures, excess separation pay represents a need to facilitate a quick and smooth transition from the failed ex-CEO to a new CEO. These results help to shed light on the dual role played by severance compensation and on the bargaining game played between the board and the departing executive.

Keywords: Executive compensation, Severance, Separation pay, CEO turnover

JEL Classification: G34, J33, J41

Suggested Citation

Huang, Peggy and Goldman, Eitan, Contractual Versus Actual Severance Pay Following CEO Departure (July 5, 2010). Available at SSRN: https://ssrn.com/abstract=1568156 or http://dx.doi.org/10.2139/ssrn.1568156

Peggy Huang

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

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