Incentive Compensation and the Likelihood of Termination: Theory and Evidence from Real Estate Organizations

51 Pages Posted: 19 Apr 2008 Last revised: 8 Feb 2010

See all articles by Greg Hallman

Greg Hallman

University of Texas at Austin - Department of Finance

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Christopher A. Parsons

Marshall School of Business, University of Southern California

Date Written: February 6, 2010

Abstract

We analyze two managerial compensation incentive devices: the threat of termination and pay for performance. We first develop a simple model predicting that these devices are substitutes: when termination incentives are low, optimal contracts provide stronger pay-for-performance incentives. We then use data from real estate organizations to provide two independent tests of the model's central prediction. First, we use the fact that CEOs of Real Estate Investment Trusts (REITs) and general partners of Real Estate Limited Partnerships (RELPs) perform similar tasks, yet organizational features of RELPs ensure that the latter are much harder to terminate. Consistent with the model, we find that pay-for-performance sensitivity is much higher for general partners of RELPs, where the termination threat is less credible. Second, we use a recent cross-section of REITs to show that in property types where it is expected to be more costly to replace managers, those managers have stronger pay-for-performance incentives.

Keywords: Executive Compensation, Agency Costs, Corporate Governance, REITs, RELPs

JEL Classification: G34

Suggested Citation

Hallman, Greg and Hartzell, Jay C. and Parsons, Christopher A., Incentive Compensation and the Likelihood of Termination: Theory and Evidence from Real Estate Organizations (February 6, 2010). Available at SSRN: https://ssrn.com/abstract=1122548 or http://dx.doi.org/10.2139/ssrn.1122548

Greg Hallman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Jay C. Hartzell (Contact Author)

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Christopher A. Parsons

Marshall School of Business, University of Southern California ( email )

3670 Trousdale Pkwy
Los Angeles, CA 90089
United States

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