, Volume 29, Issue 3, pp 315-338
Date: 24 Aug 2007

Changes in CEO compensation structure and the impact on firm performance following CEO turnover

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We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.
The authors appreciate the comments and suggestions on a much earlier version of the paper titled “Changes in CEO compensation and firm performance following CEO turnover” received from George Benston, Jeff Coles, Richard DeFusco, David Denis, Jenny Gaver, Paul Irvine, Steve Jones, Ed Kane, Steve Kane, Scott Lee, Kevin Murphy, Jeff Netter, Bob Pavlik, Robert Peevey, Annette Poulsen, Carolyn Reichert, Oliver Rui, Terry Sebora, Jerry Strawser, Patrick A. Traichal, George Tsetsekos, Jerold B. Warner, Ron Warren, Peter Xu, Zaher Zantout, Marc Zenner, seminar participants at University of Georgia, Drake University, Emory University, University of Arizona, University of Baltimore, University of Houston, and University of Nebraska-Lincoln. We also thank participants at the following conferences for their comments: the 1994 Financial Management Association, the 1994 Southern Finance Association, the 1995 Utah Winter Finance Conference, and the 1995 Southwestern Finance Association. We appreciate the research assistance of Ron Harris at Emory University. We are responsible for all errors.