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The executive turnover risk premium

Author

Listed:
  • Florian S. PETERS

    (University of Zurich and University of California at Berkeley)

  • Alexander F. WAGNER

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

Abstract

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.

Suggested Citation

  • Florian S. PETERS & Alexander F. WAGNER, 2008. "The executive turnover risk premium," Swiss Finance Institute Research Paper Series 08-11, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0811
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    References listed on IDEAS

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    More about this item

    Keywords

    Executive compensation; entrenchment; turnover; corporate governance;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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