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Incentive pay sensitivity to firm performance prior to anticipated CEO turnover
Dmitriy V Chulkov1, John M Barron2
1School of Business, Indiana University Kokomo, Kokomo, IN, USA.
Heliyon
|November 30, 2023
Summary
CEO bonus pay sensitivity to firm performance increases when a chief executive officer (CEO) nears retirement or planned departure. This links incentives to current performance, compensating for reduced long-term employment motivation.
Area of Science:
- Business
- Economics
- Management
Background:
- Executive compensation design is crucial for aligning managerial and shareholder interests.
- Understanding factors influencing CEO pay-performance sensitivity is vital for corporate governance.
Purpose of the Study:
- To investigate how the likelihood of CEO departure affects the sensitivity of their compensation to firm performance.
- To examine the role of retirement age and planned turnover in CEO pay-performance sensitivity.
Main Methods:
- Analysis of compensation and firm performance data for 3180 US publicly-traded firms.
- Econometric modeling to assess the relationship between CEO departure likelihood and bonus pay sensitivity.
Main Results:
- Bonus pay sensitivity to firm performance is higher for CEOs nearing retirement age.
- Increased bonus pay sensitivity is observed when planned CEO turnover is evident within a two-year timeframe.
- Findings support a principal-agent model explaining enhanced short-term incentives during anticipated CEO transitions.
Conclusions:
- Anticipated CEO departure necessitates adjustments in compensation strategies.
- Enhancing the link between bonus pay and concurrent performance mitigates reduced long-term incentives.
- Bonus pay plays a key role in executive compensation packages, especially during CEO transitions.
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