Changes in CEO compensation structure and the impact on firm performance following CEO turnover

Abstract

We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.The authors appreciate the comments and suggestions on a much earlier version of the paper titled "Changes in CEO compensation and firm performance following CEO turnover" received from

Big-five personality as a moderating variable in the relationship of CEO's perception and the compensation received toward CEO's desire to leave the company voluntarily

“…Compensation on a new CEO was found to increase compared with the previous CEO left the company (Blackwell et al 2007;Elsaid and Davidson 2009). Blackwell found an increase in the level of compensation occurred at the sample of voluntarily turnover, and Elsaid and Davidson found an increase in the compensation amounted to 69%.…”

Shareholder Wealth Effects of CEO Succession

“…Previous research suggests CEO pay for incumbent CEOs will be lower overall and favor performance-contingent forms of pay when the proportion of institutional investors is higher [19]. Similarly previous research suggests that new CEOs receive compensation packages favoring incentive pay instead of guaranteed forms of compensation [8], but whether the presence of institutional ownership affects the compensation structure has yet to be tested with the compensation of new CEOs.…”

“…Several studies show that compensation strategies favoring the CEO tend to be more common in firms lacking effective owneroversight. Similarly, compensation contracts which are structured to de-couple CEO pay from firm performance are associated with decreased financial performance [8,20]. Thus, new CEOs in firms with less oversight by institutional owners might have fewer decision constraints than CEOs in firms with effective institutional oversight, and financial performance could suffer.…”

“…There is some evidence the board of directors will grant significant decision autonomy to new CEOs, which can lead to significant change, regardless of whether the incoming chief executive came from inside or outside the company [7,8]. However it is also the case that because the effects of succession on financial performance are mixed, and the changes initiated by new CEOs may or may not lead to improved company performance, the objective of changes initiated by new CEOs may be to protect their positions of power in the organization [9].…”

The Impacts Of CEO Turnover & Degree Of Internationalization On The Accuracy Of Analyst Forecasts

“…ExecuComp"s executive compensation survey provided the circumstances of the CEO"s departure (e.g., retired, resigned, deceased) and this data was further cross-checked against credible news reports about the company. This study followed the same turnover assignment criteria by Blackwell and Dudney (2007), to identify forced and voluntary turnovers. From the initial group of 228 firms, the final group only considered firms with turnover events during the period under study, resulting in a final sample of 167 companies that experienced 222 turnovers during the 8 year period.…”