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Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Author

Listed:
  • Sundaram, Rangarajan K.

    () (New York University)

  • Yermack, David

    () (New York University)

Abstract

Inside debt, such as pensions and deferred compensation, constitutes a widely-used form of executive compensation, yet the valuation and incentive effects of these instruments have been almost entirely overlooked by prior work. Our paper initiates this line of research by studying CEO pension arrangements in a sample of 237 large capitalization firms. Among our findings are that CEO compensation in most large cap firms exhibits a balance between debt- and equity-based incentives, with the balance shifting systematically away from equity and toward debt as CEOs growolder; that annual increases in pension entitlements represent about 10% of overall compensation for the CEOs in our sample, and about 15% for CEOs aged 61 to 65; that CEOs with high debt-based incentives manage their firms conservatively to reduce default risk; and that pension plan compensation strongly influences patterns of CEO turnover and CEO cash compensation.

Suggested Citation

  • Sundaram, Rangarajan K. & Yermack, David, 2006. "Pay Me Later: Inside Debt and Its Role in Managerial Compensation," SIFR Research Report Series 43, Institute for Financial Research.
  • Handle: RePEc:hhs:sifrwp:0043
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ulf Axelson & Sandeep Baliga, 2009. "Liquidity and Manipulation of Executive Compensation Schemes," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3907-3939, October.
    2. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, August.
    3. Fedyk, Yuriy & Walden, Johan, 2007. "High-Speed Natural Selection in Financial Markets with Large State Spaces," SIFR Research Report Series 52, Institute for Financial Research.
    4. Yermack, David, 2006. "Golden handshakes: Separation pay for retired and dismissed CEOs," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 237-256, September.
    5. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, pages 237-253.
    6. Frydman, Carola & Molloy, Raven S., 2011. "Does tax policy affect executive compensation? Evidence from postwar tax reforms," Journal of Public Economics, Elsevier, vol. 95(11), pages 1425-1437.
    7. van Hemert, Otto, 2006. "Life-Cycle Housing and Portfolio Choice with Bond Markets," SIFR Research Report Series 44, Institute for Financial Research.
    8. Loureiro, Gilberto & Makhija, Anil K. & Zhang, Dan, 2011. "Why Do Some CEOs Work for a One-Dollary Salary?," Working Paper Series 2011-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

    More about this item

    Keywords

    CEO pensions; inside debt; deferred compensation;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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