Incentives, Termination Payments, and CEO Contracting

51 Pages Posted: 14 Apr 2017 Last revised: 21 Apr 2017

See all articles by Stuart Gillan

Stuart Gillan

University of Georgia - Department of Finance

Nga Nguyen

Marquette University

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

Gillan, Stuart L. and Nguyen, Nga, Incentives, Termination Payments, and CEO Contracting (December 1, 2016). Journal of Corporate Finance, Vol. 42, December 2016 DOI/10.1016/j.jcorpfin.2016.09.001. Available at SSRN:

Stuart L. Gillan

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Nga Nguyen (Contact Author)

Marquette University ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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