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Taxes on severance pay, corporate governance and golden handshakes

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  • Fabienne Llense

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

This paper puts forward an explanation of the rapid increase in golden handshake provision in Europe over the last ten years, based on both enhanced investor protection and attractive tax codes for severance pay. This article takes up a framework in which asymmetric information about the quality of the match between CEO and firm explains the use of golden handshakes for CEOs. It shows how corporate governance and taxation can modify the magnitude and the use of golden handshakes and thus CEO turnover rates. The second-best optimal taxation rate depends on the kind of private benefits accorded to the CEO. I show that golden handshakes should be taxed in the same way as CEO incomes. However, nonpecuniary private benefits strengten the agency cost and require some transfers for firms providing parachute-type contracts. In effect, this means partial exemption. An improvement in the quality of corporate governance should lead to smaller golden handshakes, higher turnover-performance sensitivity and the disappearance of advantageous tax codes for termination pay.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00441911.

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Date of creation: Nov 2009
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Handle: RePEc:hal:cesptp:halshs-00441911

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Keywords: CEOs turnover ; corporate governance ; golden handshakes ; optimal taxation ; severance pay.;

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