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Performance Incentives, Performance Pressure and Executive Turnover

Author

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  • Narayanan Subramanian

    (Brandeis University)

  • Atreya Chakraborty

    (Brattle Group)

  • Shahbaz Sheikh

    (Brandeis University)

Abstract

We examine the relationship between the optimal incentive contract and the firm’s decision to fire a manager for poor performance. We first derive some theoretical results using a simple principal-agent model, and then examine the empirical evidence on the incidence of forced turnover among CEOs with different compensation contracts. We find that CEOs with steeper compensation contracts (i.e., with greater incentives) are more likely to be fired following poor firm performance. Logit estimations indicate that among firms that make a net loss in a given year, a CEO receiving incentives at the 60th percentile level is 26.55% more likely to be fired than a CEO with incentives at the 40th percentile. The corresponding figure for firms whose ROA is below the industry average level is 15.07%, and for firms whose stock return is below the market return is 15.86%. The results are robust to various performance and incentive measures. Overall, our re-sults indicate that CEOs with greater incentives also face greater performance pressures.

Suggested Citation

  • Narayanan Subramanian & Atreya Chakraborty & Shahbaz Sheikh, 2002. "Performance Incentives, Performance Pressure and Executive Turnover," Finance 0210003, EconWPA, revised 24 Oct 2002.
  • Handle: RePEc:wpa:wuwpfi:0210003
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    References listed on IDEAS

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    Cited by:

    1. repec:ipg:wpaper:2014-087 is not listed on IDEAS
    2. Wided Bouaine & Lanouar Charfeddine & Mohamed Arouri & Frédéric Teulon, 2014. "The influence of CEO departure type and board characteristics on firm performance," Working Papers 2014-87, Department of Research, Ipag Business School.
    3. Bulan, Laarni T., 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 255-279.
    4. Nadide Banu Olcay, 2016. "Dynamic incentive contracts with termination threats," Review of Economic Design, Springer;Society for Economic Design, vol. 20(4), pages 255-288, December.
    5. Adil EL Fakir & Mohamed Tkiouat, 2016. "Single or Menu Contracting: A Game Theory Application of the Hersanyi Model to Mudaraba Financing," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 221-230.

    More about this item

    Keywords

    Incentive Contracts; Executive Compensation; Equity-based compensation; Management Turnover;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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