Please use this identifier to cite or link to this item: http://hdl.handle.net/2440/118092
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Type: Journal article
Title: CEO incentive pay around performance declines
Author: Canil, J.
Rosser, B.
Citation: Managerial Finance, 2018; 44(8):1047-1067
Publisher: Emerald
Issue Date: 2018
ISSN: 0307-4358
1758-7743
Statement of
Responsibility: 
Jean Canil and Bruce Rosser
Abstract: Purpose - The authors study stock and option grants around abrupt performance declines for continuing CEOs and find that firms facing abrupt financial declines grant more options than stock, while firms facing operational decline grant more stock than options. Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. The paper aims to discuss these issues. Design/methodology/approach - To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. Findings - Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. Originality/value - Several studies examine the relationship between poor performance and compensation of newly appointed CEOs. But firms regularly employ retention or incentive plans when experiencing distress to prevent critical employees from leaving when they are most needed (Goyal and Wang, 2017). Employee turnover results in a loss of continuity coupled with high search and training costs for replacement personnel. Beneish et al. (2017) find that 57 percent of CEOs associated with intentional misreporting retain their jobs, implying the costs of removing CEOs is high, especially if the incumbent CEO has a strong track record relative to industry peers prior to the period before the misreporting begins. The board fires the CEO if future firm value under the CEO is expected to be lower than under the best alternative CEO less adjustment costs (e.g. search costs, severance pay).
Keywords: Options; executives; stock; incentive; exercise price; performance decline
Rights: © Emerald Publishing Limited 2018 Published by Emerald Publishing Limited Licensed re-use rights only
RMID: 0030095667
DOI: 10.1108/MF-03-2018-0100
Appears in Collections:Business School publications

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