Pay Me Now (and Later): Pension Benefit Manipulation before Plan Freezes and Executive Retirement

52 Pages Posted: 22 Feb 2016 Last revised: 23 Dec 2016

See all articles by Irina Stefanescu

Irina Stefanescu

Federal Reserve Board, Washington D.C.; Organization for Economic Co-Operation and Development (OECD)

Yupeng Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Kangzhen Xie

Seton Hall University, Stillman School of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: December 15, 2016

Abstract

Large U.S. firms modify top executives’ compensation before pension-related events. Top executives receive one-time increases in pensionable earnings through higher annual bonuses one year before a plan freeze and one year before retirement. Firms also boost pension payouts by lowering plan discount rates when top executives are eligible to retire with lump-sum benefit distributions. Increases in executive pensions do not appear to be an attempt to improve managerial effort or retention, and are more likely to occur at firms with poor corporate governance. These findings suggest that in some circumstances managers are able to extract rents through their pension plans.

Keywords: Corporate governance; Executive annual bonuses; Defined benefit pension plans; Pension freezes; Executive retirement

JEL Classification: G31; G32; G34; M40

Suggested Citation

Stefanescu, Irina and Wang, Yupeng and Xie, Kangzhen and Yang, Jun, Pay Me Now (and Later): Pension Benefit Manipulation before Plan Freezes and Executive Retirement (December 15, 2016). Best Paper Award - Melbourne Business School, 2016 Financial Institutions, Regulation & Corporate Governance (FIRCG) Conference; Journal of Financial Economics (JFE), Forthcoming; Netspar Discussion Paper No. 12/2014-096 - revised version October 2016; Kelley School of Business Research Paper No. 16-24. Available at SSRN: https://ssrn.com/abstract=2736044 or http://dx.doi.org/10.2139/ssrn.2736044

Irina Stefanescu

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

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

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Yupeng Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-615
Cambridge, MA 02142
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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