The Executive Turnover Risk Premium

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-06-12

Summary:

Editor's Note: The following post comes to us from Florian Peters, Assistant Professor of Finance at the University of Amsterdam and Alexander Wagner, Professor of Finance at the University of Zurich.

In our forthcoming Journal of Finance paper, The Executive Turnover Risk Premium, we make the simple point that forced turnover risk explains an important part of the cross-sectional variation of compensation for the CEOs of public U.S. corporations. The empirical magnitude of the turnover risk premium—about 7% greater subjective compensation for a one percentage point increase in turnover risk—is in line with calibrated theoretical predictions.

To identify the turnover risk premium, we use sources of job risk that are arguably outside the CEO’s control such as changing industry conditions. This strategy relies on the idea that, in practice, firing occurs not only when the CEO reveals low general ability. Rather, a board may fire a CEO when industry conditions change in such a way that his skill set no longer matches the new industry requirements. It is this kind of exogenous risk exposure that should plausibly be compensated in CEO pay.

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Link:

http://blogs.law.harvard.edu/corpgov/2014/06/12/the-executive-turnover-risk-premium/

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Tags:

academic research executive compensation alexander wagner entrenchment executive turnover florian peters management risk

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

06/12/2014, 15:50

Date published:

06/12/2014, 09:34