Pension Incentives and the Cyclicality of CEO Turnover

Abstract

CEO turnover is highly cyclical, varying positively with economic growth. This paper examines whether the cyclical relation can be partially explained by contracting incentives that encourage CEOs to depart when the economy is doing well. We find robust evidence that cyclical turnover is largely concentrated among retirement-aged CEOs with vested pensions. Because CEO pay is pro-cyclical and pension payouts are based on pay in the final years of tenure, CEOs with pensions can potentially increase their retirement wealth by departing when the economy is doing well. Pension-driven cyclical retirement is present in firms with a variety of governance characteristics, but concentrated in firms with lower CEO compensation relative to expected levels, suggesting that cyclical pension incentives serve as a substitute for other forms of pay. To our knowledge, our paper is the first to empirically test contracting determinants of cyclical turnover. In doing so, we provide needed evidence on the predictors of voluntary retirement, a common but relatively under-studied type of CEO departure.

Keywords: CEO turnover; cyclicality; corporate governance; executive retirement; pensions

JEL Classification: E320; G340; J140; J260; M510