Performance Pay, CEO Dismissal, and the Dual Role of Takeovers

Mike Burkart and Konrad Raff ()

FMG Discussion Papers from Financial Markets Group

Abstract: We propose that an active takeover market provides incentives by o¤ering acqui- sition opportunities to successful managers. This allows ?rms to reduce performance- based compensation and can rationalize loss-making acquisitions. At the same time, takeovers remain a substitute for board dismissal in the replacement of poorly per- forming managers. The joint impact of the two mechanisms on managerial turnover is, however, multi-faceted: In ?rms with strong boards, turnover and performance- based pay are non-monotonic in the intensity of the takeover threat. In ?rms with weak boards, turnover (performance-based pay) increases (decreases) with the in- tensity of the takeover threat. When choosing its acquisition policy and the quality of its board, each ?rm ignores the adverse e¤ect on other ?rms?acquisition oppor- tunities and takeover threat. As a result, the takeover market is not su¢ ciently liquid and too few takeovers occur.

Date: 2011-11
New Economics Papers: this item is included in nep-bec, nep-hrm and nep-lab
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Related works:
Journal Article: Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (2015)
Working Paper: Performance pay, CEO dismissal, and the dual role of takeovers (2015)
Working Paper: Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (2012)
Working Paper: Performance pay, CEO dismissal, and the dual role of takeovers (2011)
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