Incentives for CEOS to Exit

Inderst, Roman; Mueller, Holger M.

doi:10.2139/ssrn.666162

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Incentives for CEOS to Exit

27 Pages Posted: 6 Mar 2005

See all articles by Roman Inderst

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

There are 2 versions of this paper

Date Written: January 2005

Abstract

An important question for firms in dynamic industries is how to induce a CEO to reveal information that the firm should change its strategy, in particular when a strategy change might cause his own dismissal. We show that the uniquely optimal incentive scheme from this perspective consists of options, a base wage, and severance pay. Option compensation minimizes the CEO's expected on-the-job pay from continuing with a poor strategy. Hence, a smaller severance payment is needed to induce the CEO to reveal information causing a strategy change than, e.g., under stock compensation or other forms of variable pay. The model suggests how deregulation and massive technological changes in the 1980s and 1990s may have contributed to the dramatic rise in CEO pay and turnover over the same period.

Keywords: CEO compensation, stock options, strategy, private information

JEL Classification: D82, J33, L21, M52, G34

Suggested Citation: Suggested Citation

Inderst, Roman and Mueller, Holger M., Incentives for CEOS to Exit (January 2005). Available at SSRN: https://ssrn.com/abstract=666162 or http://dx.doi.org/10.2139/ssrn.666162