Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority

34 Pages Posted: 16 Sep 2004 Last revised: 19 Oct 2018

See all articles by Riccardo Calcagno

Riccardo Calcagno

Politecnico di Torino

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)


We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts. Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice. We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives ("contract substitution" effect). If managerial compensation has priority over the debt claims, higher leverage produces lower power-incentive schemes (lower bonuses) and a higher base salary. With junior compensation, we expect more emphasis on pay-for-performance incentives. The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms.

Keywords: seniority of claims, remuneration contracts, financial distress, insolvency, leverage

JEL Classification: G32, G33, G34, K12

Suggested Citation

Calcagno, Riccardo and Renneboog, Luc, Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority. ECGI - Finance Working Paper No. 47/2004, CentER Working Paper No. 2000-101, Journal of Banking and Finance, Vol. 31, 2007, Available at SSRN: or

Riccardo Calcagno (Contact Author)

Politecnico di Torino ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

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

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE

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