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Performance Incentives, Performance Pressure and Executive Turnover

Author

Listed:
  • 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, University Library of Munich, Germany, revised 24 Oct 2002.
    • Handle: RePEc:wpa:wuwpfi:0210003
    Note: Type of Document - PDF; prepared on LaTeX for Windows (MikTeX);
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Incentive Contracts; Executive Compensation; Equity-based compensation; Management Turnover;
    All these keywords.

    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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