CEO Investment of Deferred Compensation Plans and Firm Performance
33 Pages Posted: 27 May 2020
Date Written: July/August 2019
We study how US chief executive officers (CEOs) invest their deferred compensation plans depending on the firm's profitability. By looking at the correlation between the CEO's return on these plans and the firm's stock return, we show that deferred compensation is to a large extent invested in the company equity in good times and divested from it in bad times. The divestment from company equity in bad times arguably reflects CEOs' incentive to abandon the firm and to invest in alternative instruments to preserve the value of their deferred compensation plans. This result suggests that the incentive alignment effects of deferred compensation crucially depend on the firm's health status.
Keywords: corporate distress, deferred compensation, executive compensation
JEL Classification: G32, G34
Suggested Citation: Suggested Citation