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Executive Compensation Limits and Executive Turnover

Author

Listed:
  • Vikram Nanda

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080)

  • Sabatino (Dino) Silveri

    (Fogelman College of Business and Economics, University of Memphis, Memphis, Tennessee 38152; Department of Finance, John Chambers College of Business and Economics, West Virginia University, Morgantown, West Virginia 26505)

  • Kun Wang

    (School of Economics and Management, Tsinghua University, Beijing 100084, China)

  • Le Zhao

    (Business School, Nankai University, Tianjin 300071, China; Digital Economy Interdisciplinary Science Center, Nankai University, Tianjin 300071, China)

Abstract

We explore the consequences of limiting executive pay on voluntary executive turnover by exploiting a Chinese government policy restricting executive pay at a subset of firms. Affected firms experience an increase in voluntary executive turnover, with executives increasingly moving to firms not bound by the pay policy. Executives that leave are of higher quality as suggested by their stronger stock and accounting performance in the year prior to the turnover. Affected firms suffer firm value losses, especially when talented executives leave. Our findings demonstrate the importance of compensation contracts in retaining executives and suggest a need for regulatory caution, since mandated constraints aimed at trying to “fix” executive pay can hurt firm value and ultimately, hurt shareholders.

Suggested Citation

  • Vikram Nanda & Sabatino (Dino) Silveri & Kun Wang & Le Zhao, 2024. "Executive Compensation Limits and Executive Turnover," Management Science, INFORMS, vol. 70(4), pages 2382-2405, April.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:4:p:2382-2405
    DOI: 10.1287/mnsc.2023.4812
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