Performance Pay, CEO Dismissal, and the Dual Role of Takeovers

36 Pages Posted: 1 Mar 2012

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Konrad Raff

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

Abstract

We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performance-based compensation and can rationalize loss-making acquisitions. At the same time, takeovers remain a substitute for board dismissal in the replacement of poorly performing managers. The joint impact of the two mechanisms on managerial turnover is, however, multi-faceted: In firms with strong boards, turnover and performance-based pay are non-monotonic in the intensity of the takeover threat. In firms with weak boards, turnover (performance-based pay) increases (decreases) with the intensity of the takeover threat. When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms' acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur.

Keywords: Board Interference, CEO Turnover, Compensation, Takeover

JEL Classification: G34

Suggested Citation

Burkart, Mike C. and Raff, Konrad, Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (February 2012). CEPR Discussion Paper No. DP8794. Available at SSRN: https://ssrn.com/abstract=2013765

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Konrad Raff

Norwegian School of Economics (NHH) ( email )

Department of Finance
Helleveien 30
Bergen, 5045
Norway

HOME PAGE: http://sites.google.com/site/raffkonrad/

Register to save articles to
your library

Register

Paper statistics

Downloads
4
Abstract Views
690
PlumX Metrics