Layoffs and Chief Executive Officer (CEO) Compensation: Does CEO Power Influence the Relationship?

Abstract

We examine the association between layoffs and chief executive oficer (CEO) compensation. Because of the public scrutiny and political pressures associated with both CEO compensation and layoffs, we expect firms to alter CEO compensation by reducing bonus pay and increasing equity-based compensation as the magnitude of the layoff increases. Consistent with the predicted substitution, we find that as layoffs intensify, CEOs' bonus compensation decreases and their equity-based compensation increases. When we consider whether these compensation adjustments vary with CEO power, we find that as the layoff magnitude increases, relative to less powerful CEOs, more powerful CEOs experience smaller reductions in bonus pay, a higher likelihood of receiving a bonus, and comparable increases in equity compensation. Finally, we report evidence that post-layoff market performance of firms led by more powerful CEOs is not superior to that of firms led by less powerful CEOs. Collectively, the results suggest that the preferential compensation arrangements afforded more powerful CEOs is inconsistent with eficient contracting. Instead, the combined results are consistent with the managerial power theory.

The impact of the high technology crisis on CEO compensation

“…Before the market adjustment, CEOs with large ownership shares of their companies received more compensation than those with fewer shares, but this situation reversed after the market adjustment. The change is consistent with managerial power theory whereby CEO power leads to rent seeking and weaker governance structures [27]. Speculation drove the tech market boom of the 1990s.…”

CEO characteristics and firm performance: focus on origin, education and ownership

“…The analysis used cross-sectional observations of 6 years from the selected firms. Ordinary least square model is used by prior studies in testing the hypothesis on the relationship between CEO characteristics and firm outcomes such as financial performance (Barker and Mueller 2002;Henderson et al 2010;Simsek 2007). The model is expressed as follows:…”

CEO Characteristics and Internal Control Quality

“…In this way, an entrenched CEO may compromise the board's ability to monitor managerial decisions (Finkelstein & D'Aveni, 1994). Managerial power theory (Bebchuk, Fried, & Walker, 2002) suggests that CEO power affects the design of compensation contracts, and powerful CEOs are more likely to receive increases in bonus and equity compensation (Henderson, Masli, Richardson, & Sanchez, 2010). Liu and Jiraporn (2010) extend the CEO entrenchment hypothesis and find that the cost of debt is higher for firms with more dominant CEOs, while accounting restatements initiated by the SEC are also associated with stronger managers (Cheng, Gao, Lawrence, &Smith, 2011).…”