Pay Me Now (and Later): Bonus Boosts Before Pension Freezes and Executive Departures

43 Pages Posted: 5 Dec 2014 Last revised: 26 Aug 2015

See all articles by Irina Stefanescu

Irina Stefanescu

Federal Reserve Board, Washington D.C.

Kangzhen Xie

Seton Hall University, Stillman School of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 3, 2015

Abstract

We show that large public companies in the United States change the assumptions of the benefit formulas of the defined benefits pension plans for their top executives in anticipation of plan freezes and executive retirements. In particular, on average top executives receive a boost in annual bonuses (an input of the pension benefit formula) by 15–50% one year before pension freezes and executive departures. Such boosts are not driven by firm performance or other known determinants of annual bonuses. Our findings are also robust to alternative research designs that address potential endogeneity problems. Interestingly, we do not find significant increases in equity awards, which do not affect the value of pension benefits, before pension freezes or executive departures.

Keywords: Defined benefit pension plans; SERP; Pension freeze; Executive bonuses

JEL Classification: G31; G32; G34; M40

Suggested Citation

Stefanescu, Irina and Xie, Kangzhen and Yang, Jun, Pay Me Now (and Later): Bonus Boosts Before Pension Freezes and Executive Departures (July 3, 2015). Kelley School of Business Research Paper No. 15-5. Available at SSRN: https://ssrn.com/abstract=2533459 or http://dx.doi.org/10.2139/ssrn.2533459

Irina Stefanescu

Federal Reserve Board, Washington D.C. ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kangzhen Xie

Seton Hall University, Stillman School of Business ( email )

South Orange, NJ 07079
United States

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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