The Hidden Nature of Executive Retirement Pay

56 Pages Posted: 3 Feb 2014 Last revised: 20 May 2016

Date Written: February 2, 2014


There are two competing theories of why public companies pay executives generous retirement benefits. One is that retirement pay is easier to hide from shareholders than other forms of compensation. The other is that retirement benefits align executives' interests with those of long-term creditors, since the executives may not receive their payouts if the firm goes bankrupt. The latter view depends on the assumption that retirement benefits put executives in a similar contractual position as the company's creditors. Yet no previous work has tested that assumption.

This Article provides the first systematic study of the contractual structure of executive retirement payouts. Using retirement pay data for thousands of executives, we show that a large proportion of executives link the value of their payouts to the company's stock price and receive the bulk of these payouts immediately following their departure -- features that contradict the incentive-alignment theory of retirement pay. The evidence also shows that the full amount and structure of retirement pay are undisclosed -- findings consistent with the camouflage theory. While the structure of some executives' payouts can be reconciled with the incentive-alignment theory, current rules do not give investors the information they need to tell the difference between payouts that align incentives and those that camouflage compensation. Lawmakers should require companies to reveal the magnitude and structure of these payouts, and neither regulators nor commentators should assume that retirement benefits suppress top managers' appetite for risk.

Keywords: Executive compensation, executive retirement benefits, executive pensions, pay for performance, inside debt

JEL Classification: J33, M41, M45, G48

Suggested Citation

Jackson, Jr., Robert J. and Honigsberg, Colleen, The Hidden Nature of Executive Retirement Pay (February 2, 2014). Virginia Law Review No. 479 (2014), Columbia Law and Economics Working Paper No. 475 , Columbia Business School Research Paper No. 14-27, Available at SSRN:

Robert J. Jackson, Jr. (Contact Author)

Professor of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Colleen Honigsberg

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305
United States

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