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Structure of Compensation and CEO Job Turnover

This paper provides empirical evidence of the effect stock options and total compensation on the job turnover of corporate Chief Executive Officers (CEOs). Our estimates indicate that both the amount and the composition of the compensation package are important determinants of CEO turnover probability. Holding the total amount of compensation constant, an increase in the proportion of stock options in the total compensation from the 25 percentile level to the 75 percentile level would result in a decrease in annual CEO turnover probability from 10 percent to 6.8 percent. The significant negative effect of stock options on CEO turnover is consistent with the view that options are used as deferred compensation to provide longer term incentives to CEOs. Moreover, holding the proportion of stock options constant, if the amount of total compensation increases from the 25 percentile level to the 75 percentile level, the annual turnover probability would decrease from 10 percent to 6.9 percent. Extraordinary amounts of CEO compensation are often justified based on the assumption that they encourage royalty and reduce turnover rate. The negative effect of the total compensation on turnover rate provides some support for such a claim. In addition, we found that a failure to control for the left censoring biases leads to severe underestimation of the effects of firm performance on CEO turnover probability. These biases may have lead previous studies to severely underestimate the dismissal related pay-for-performance sensitivity. The effect of interlocking directorship on CEO turnover probability also disappears after controlling for the biases.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2006_15.pdf
File Function: First version, 2006
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Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2006_15.

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Length: 26 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2006_15
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  1. Kenneth Bollen & David Guilkey & Thomas Mroz, 1995. "Binary outcomes and endogenous explanatory variables: Tests and solutions with an application to the demand for contraceptive use in tunisia," Demography, Springer, vol. 32(1), pages 111-131, February.
  2. Goyal, Vidhan K. & Park, Chul W., 2002. "Board leadership structure and CEO turnover," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 49-66, January.
  3. Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2000. "Executive Compensation in the Information Technology Industry," Management Science, INFORMS, vol. 46(4), pages 530-547, April.
  4. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 331-344, September.
  5. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  6. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
  7. Gaver, Jennifer J. & Gaver, Kenneth M., 1993. "Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 125-160, April.
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