Payday Before Mayday: CEO Compensation Contracting for Distressed Firms
60 Pages Posted: 31 Jul 2018 Last revised: 1 Oct 2018
Date Written: July 10, 2018
Using detailed information for CEO compensation contracts of 1,400 US public firms from 1998-2016, we examine contracting changes when firms become financially distressed. When performance declines, firms face significant challenges in liquidity, CEO retention or replacement, and CEO incentive alignment with shareholders versus creditors, each impacting contracting and CEO incentives. We find that distressed firms increase their use of formulaic performance based pay, reducing payouts of discretionary cash bonuses. Distressed firms increase (decrease) their use of cash flow related (accounting-based) metrics in performance based pay and set performance targets farther above prior performance. Contract changes are increasingly important near default.
Keywords: Financial Distress, CEO Compensation, Contracting, Default, Creditors
JEL Classification: G34
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