Incentives, Termination Payments, and CEO Contracting
51 Pages Posted: 14 Apr 2017 Last revised: 21 Apr 2017
Date Written: December 1, 2016
Many executives have compensation that is potentially forfeit conditioned on the circumstances surrounding their departure from the firm. We study firms' endogenous decisions to use such compensation "holdbacks" as a bonding device and find that firms with higher executive replacement costs, greater information asymmetry, more certain operating environments, and recent accounting concerns are more likely to have holdbacks. Additionally, holdbacks are negatively associated with incentive-based compensation, consistent with theoretical predictions that termination incentives can substitute for incentive pay. Further, holdbacks are positively associated with abnormal compensation, consistent with arguments that managers demand a premium to accept risky pay.
Keywords: CEO Compensation; Holdbacks; Clawbacks; Termination Incentives; Contracting
JEL Classification: G30; G32
Suggested Citation: Suggested Citation