The relationship between incentive compensation and forced CEO turnover

Atreya Chakraborty, University of Massachusetts Boston
Shahbaz A. Sheikh, The University of Western Ontario
Narayanan Subramanian, Cornerstorne Research

Abstract

We study the relationship between incentive compensation and performance related CEO turnover. Our theoretical model predicts that the slope of the compensation contract and forced turnover may be complements. Our results support this prediction. We find that incentives and turnover are positively related. This relationship however, varies with the equity ownership of CEOs and does not hold for CEOs who own more than 5% equity. Moreover, this relationship is stronger if the firm under performs its industry. Our results suggest that high-powered incentives may increase the signaling power of performance measures and lead to higher likelihood of turnover.