Contractual Versus Actual Severance Pay Following CEO Turnover
39 Pages Posted: 20 Mar 2011
Date Written: March 14, 2011
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: Suggested Citation