Does Capital Structure Matter in Setting CEO Pay?

59 Pages Posted: 29 Feb 2004

See all articles by Hernan Ortiz-Molina

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Date Written: April 2005

Abstract

I examine how CEO compensation packages and pay-performance sensitivities are related to firms' capital structures. The results are fully consistent with shareholders designing compensation contracts not only to align incentives with managers, but also to mitigate stockholder-bondholder conflicts regarding risk-taking. The evidence is also weakly consistent with higher debt reducing manager-shareholder conflicts. Specifically, I find that CEOs in more levered firms have lower pay-performance sensitivities estimated by the empirical relation between changes in a CEO's firm-related wealth and changes in shareholder wealth. Closer examination reveals that pay-performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. In addition, stock option policy is the component of CEO pay that is most sensitive to cross-sectional differences in capital structure.

Keywords: Executive compensation, corporate governance, agency problems, capital structure

JEL Classification: G32, G34, J33, D82

Suggested Citation

Ortiz-Molina, Hernan, Does Capital Structure Matter in Setting CEO Pay? (April 2005). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=510262 or http://dx.doi.org/10.2139/ssrn.510262

Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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