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The executive turnover risk premium

  • Florian S. PETERS

    (University of Zurich and University of California at Berkeley)

  • Alexander F. WAGNER

    (University of Zurich, Swiss Finance Institute and Harvard University)

Executive compensation has increased dramatically over the past 15 years, but so has forced CEO turnover. We argue that part of the development of CEO pay can be explained by the adverse consequences that forced turnover implies for a CEO. We ¯nd that for the CEOs of the largest US corporations, a one percentage point increase in exogenous turnover risk is associated with $40,000 to $90,000 more in terms of total compensation. The size of this risk premium is in line with estimates of the importance of career concerns and forfeiture risk. This relation survives a test of reverse causation and controlling for unobserved ¯rm heterogeneity. We argue that the robustly positive correlation between turnover and compensation is not consistent with a view of entrenched CEOs setting their own compensation and turnover risk.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 08-11.

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Length: 45 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:chf:rpseri:rp0811
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