Contractual Versus Actual Severance Pay Following CEO Turnover

39 Pages Posted: 20 Mar 2011

See all articles by Eitan Goldman

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance; European Corporate Governance Institute (ECGI)

Peggy Huang

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

Date Written: March 14, 2011

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 companies. We analyze what determines whether or not a departing CEO receives separation pay in excess of her severance contract. We find that discretionary separation pay is, on average, $8 million, which amounts to close to 242% of a CEO’s annual compensation. We investigate several potential explanations for this phenomenon and find evidence that in voluntary CEO departures, discretionary separation pay represents a governance problem. In contrast, we find evidence that in forced departures, discretionary separation pay is used to facilitate an amicable 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, Managerial incentives, CEO turnover, Bargaining

JEL Classification: G34, J33, J41

Suggested Citation

Goldman, Eitan and Huang, Peggy, Contractual Versus Actual Severance Pay Following CEO Turnover (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1785798 or http://dx.doi.org/10.2139/ssrn.1785798

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)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

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