Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 43: Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Rangarajan K. Sundaram () and David Yermack ()
Additional contact information
Rangarajan K. Sundaram: New York University, Postal: Department of Finance, Stern School of Business, 44 West 4th St., Suite 9-160, New York, NY 10012, USA
David Yermack: New York University, Postal: Stern School of Business, 44 West 4th St., Suite 9-160, New York, NY 10012, USA

Abstract: Inside debt, such as pensions and deferred compensation, constitutes a widely-used form of executive compensation, yet the valuation and incentive effects of these instruments have been almost entirely overlooked by prior work. Our paper initiates this line of research by studying CEO pension arrangements in a sample of 237 large capitalization firms. Among our findings are that CEO compensation in most large cap firms exhibits a balance between debt- and equity-based incentives, with the balance shifting systematically away from equity and toward debt as CEOs growolder; that annual increases in pension entitlements represent about 10% of overall compensation for the CEOs in our sample, and about 15% for CEOs aged 61 to 65; that CEOs with high debt-based incentives manage their firms conservatively to reduce default risk; and that pension plan compensation strongly influences patterns of CEO turnover and CEO cash compensation.

Keywords: CEO pensions; inside debt; deferred compensation

JEL-codes: G34; J33

34 pages, February 15, 2006

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