Incentive pay sensitivity to firm performance prior to anticipated CEO turnover.

ABSTRACT: This study explores whether the sensitivity of CEO compensation to changes in firm performance depends on the CEO's likelihood of leaving the position. In a sample of 3180 US publicly-traded firms, we find that the sensitivity of bonus pay to firm performance is enhanced for a CEO who has reached retirement age. Further, we find that the sensitivity of bonus pay to firm performance is greater when there is evidence of a planned CEO turnover within a two-year window. We show that these findings are consistent with a principal-agent model in which firms who anticipate a greater likelihood of CEO departure find it advantageous to enhance the link between bonus pay and concurrent performance measures to compensate for the lowering of incentives that rely on the manager being employed long-term

SUBMITTER: Chulkov DV 

PROVIDER: S-EPMC10684370 | biostudies-literature | 2023 Nov

REPOSITORIES: biostudies-literature