Decoupling CEO wealth and firm performance: the case of acquiring CEOs

We explore how compensation policies following mergers affect a CEO’s incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO’s pay and overall wealth become insensitive to negative stock performance, but a CEO’s wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs ’ compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures. THE SEPARATION OF OWNERSHIP AND CONTROL leads to many potential conflicts of interest between shareholders and corporate management. Since Jensen and Meckling (1976), the literature has focused much attention on how managerial ownership and compensation design can be used to align manager and share-holder interests. The bulk of the empirical evidence supports the hypothesis that managers with greater ownership or managers with more equity-base