Performance Incentives, Performance Pressure and Executive Turnover

Narayanan Subramanian, Atreya Chakraborty () and Shahbaz Sheikh
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Narayanan Subramanian: Brandeis University
Shahbaz Sheikh: Brandeis University

Finance from EconWPA

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.

Keywords: Incentive Contracts; Executive Compensation; Equity-based compensation; Management Turnover (search for similar items in EconPapers)
JEL-codes: D23 G32 J33 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm and nep-lab
Date: 2002-10-16, Revised 2002-10-24
Note: Type of Document - PDF; prepared on LaTeX for Windows (MikTeX);
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0210003

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