The Role of Deferred Pay in Retaining Managerial Talent

54 Pages Posted: 22 May 2014 Last revised: 12 May 2021

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Sheng Huang

China Europe International Business School (CEIBS)

Johan Maharjan

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Date Written: June 4, 2016

Abstract

We examine the role of deferred vesting of stock and option grants in reducing executive turnover. To the extent an executive forfeits all unvested stock and option grants if she leaves the firm, deferred vesting will increase the cost (to the executive) of early exit. Using pay Duration proposed in Gopalan, et al. (2014) as a measure of the extent of deferred vesting, we find that CEOs and non-CEO executives with longer pay Duration are less likely to leave the firm voluntarily. Employing the vesting of a large prior-year stock/option grant as an instrument for Duration, we find the effect to be causal. Consistent with long pay Duration reflecting firms’ retention intentions, CEOs with longer pay Duration are also less likely to experience a forced turnover and the sensitivity of forced turnover to firm performance is significantly lower among firms that grant longer pay Duration. Overall, our study highlights a strong link between compensation design and turnover of top executives.

Keywords: Executive compensation, pay duration, talent retention, management turnover, turnover-performance sensitivity

JEL Classification: G30, G34

Suggested Citation

Gopalan, Radhakrishnan and Huang, Sheng and Maharjan, Johan, The Role of Deferred Pay in Retaining Managerial Talent (June 4, 2016). Available at SSRN: https://ssrn.com/abstract=2439330 or http://dx.doi.org/10.2139/ssrn.2439330

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sheng Huang (Contact Author)

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Johan Maharjan

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

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