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Severance agreements, incentives and CEO dismissal

Author

Listed:
  • Clara Graziano

    (University of Udine, Department of Economics and Statistics)

  • Annalisa Luporini

    (University of Florence, Department of Economics)

Abstract

We analyze how severance pay can alleviate the conflict between firing a manager and simultaneously providing him with the incentive to exert effort before being fired. Contrary to previous literature, in our model severance pay is contingent on firm performance. We show that severance pay contingent on firm performance can solve the conflict by rewarding the manager only in case of investment success.

Suggested Citation

  • Clara Graziano & Annalisa Luporini, 2017. "Severance agreements, incentives and CEO dismissal," Economics Bulletin, AccessEcon, vol. 37(1), pages 440-447.
    • Handle: RePEc:ebl:ecbull:eb-16-00636
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2017/Volume37/EB-17-V37-I1-P40.pdf
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    References listed on IDEAS

    as
    1. Yermack, David, 2006. "Golden handshakes: Separation pay for retired and dismissed CEOs," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 237-256, September.
    2. Brian Bell & John Reenen, 2014. "Bankers and Their Bonuses," Economic Journal, Royal Economic Society, vol. 124(574), pages 1-21, February.
    3. Roman Inderst & Holger M. Mueller, 2010. "CEO Replacement Under Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
    4. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, April.
    5. Michael Faulkender & Dalida Kadyrzhanova & N. Prabhala & Lemma Senbet, 2010. "Executive Compensation: An Overview of Research on Corporate Practices and Proposed Reforms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 107-118, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    managerial compensation; severance pay; firing policy;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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