Contractual Versus Actual Severance Pay Following CEO Departure

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