The Role of Deferred Equity Pay in Retaining Managerial Talent

Posted: 23 May 2021

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Sheng Huang

China Europe International Business School (CEIBS)

Johan Maharjan

Rensselaer Polytechnic Institute (RPI)

Date Written: May 12, 2021

Abstract

We examine the extent to which deferred vesting of stock and option grants (deferred pay) helps firms retain executives. To the extent an executive forfeits all deferred pay if they leave the firm, deferred vesting will increase the cost (to the executive) of an early exit. The impact of deferred pay on executive retention, a key ingredient for firms to create shareholder value, is hence an important empirical issue. Using pay duration proposed in Gopalan et al. (2014) as a measure of the extent of deferred equity, we find that CEOs and non-CEO executives with longer pay duration are less likely to leave the firm voluntarily. The talent retention role of deferred pay is mitigated by performance-vesting provisions and signing bonuses offered by industry peers. Moreover, we also find that voluntary turnover is less sensitive to pay duration for executives who are perceived to be more talented and have more firm-specific skills. Overall, our study highlights a strong link between compensation design and turnover of top executives. It suggests that firms take into account the need for retaining managerial talent in designing executive compensation.

Keywords: executive compensation, pay duration, talent retention, management turnover, turnover-performance sensitivity

JEL Classification: G30, G34

Suggested Citation

Gopalan, Radhakrishnan and Huang, Sheng and Maharjan, Johan, The Role of Deferred Equity Pay in Retaining Managerial Talent (May 12, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3849520

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sheng Huang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Johan Maharjan (Contact Author)

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

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