Contractual vs. Actual Separation Pay Following CEO Turnover

Using hand-collected data, we document the details of the ex ante severance contracts and the ex post separation pay given to S&P 500 chief executive officers (CEOs) upon departing from their companies. We analyze what determines whether or not a CEO receives separation pay in excess of the amount specified in the severance contract. We find that discretionary separation pay is given to about 40% of departing CEOs and is, on average, $8 million, which amounts to close to 242% of a CEO’s annual compensation. We investigate the determinants of discretionary separation pay and find, for example, that discretionary separation pay positively correlates with weak internal governance in cases of voluntary CEO turnover but not when the CEO is forced out. We also find that discretionary pay is higher when the CEO has a noncompete clause in her ex ante severance contract. Event study analysis suggests that shareholders benefit from discretionary separation pay in forced turnovers but not in voluntary ones. Our overall results help to shed light on the complex role of discretionary separation pay in the bargaining game between boards and departing executives. This paper was accepted by Itay Goldstein, finance.

• 저널Management Science · 61(5) · 1108–1120
• 토픽Corporate Finance and Governance · Accounting
• DOI10.1287/mnsc.2014.1988
• 저자Eitan Goldman, Peggy Huang