Payday Before Mayday: CEO Compensation Contracting for Distressed Firms

60 Pages Posted: 31 Jul 2018 Last revised: 1 Oct 2018

See all articles by Mary Ellen Carter

Mary Ellen Carter

Boston College - Department of Accounting

Edith S. Hotchkiss

Boston College - Carroll School of Management

Mahdi Mohseni

Texas A&M University - Department of Finance

Date Written: July 10, 2018

Abstract

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

Suggested Citation

Carter, Mary Ellen and Hotchkiss, Edith S. and Mohseni, Mahdi, Payday Before Mayday: CEO Compensation Contracting for Distressed Firms (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=3211591 or http://dx.doi.org/10.2139/ssrn.3211591

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Mahdi Mohseni

Texas A&M University - Department of Finance ( email )

360N Wehner Building, 4218 TAMU
College Station, TX Texas 77843
United States

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