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Performance Incentives, Performance Pressure and Executive Turnover

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Author Info
Narayanan Subramanian (Brandeis University)
Atreya Chakraborty (Brattle Group)
Shahbaz Sheikh (Brandeis University)

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Abstract

We examine the relationship between the optimal incentive contract and the firm’s decision to fire a manager for poor performance. We first derive some theoretical results using a simple principal-agent model, and then examine the empirical evidence on the incidence of forced turnover among CEOs with different compensation contracts. We find that CEOs with steeper compensation contracts (i.e., with greater incentives) are more likely to be fired following poor firm performance. Logit estimations indicate that among firms that make a net loss in a given year, a CEO receiving incentives at the 60th percentile level is 26.55% more likely to be fired than a CEO with incentives at the 40th percentile. The corresponding figure for firms whose ROA is below the industry average level is 15.07%, and for firms whose stock return is below the market return is 15.86%. The results are robust to various performance and incentive measures. Overall, our re-sults indicate that CEOs with greater incentives also face greater performance pressures.

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Paper provided by EconWPA in its series Finance with number 0210003.

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Date of creation: 16 Oct 2002
Date of revision: 24 Oct 2002
Handle: RePEc:wpa:wuwpfi:0210003

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Web page: http://129.3.20.41

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Related research
Keywords: Incentive Contracts; Executive Compensation; Equity-based compensation; Management Turnover;

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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