CEO turnover and compensation: An empirical investigation

CEO turnover events provide a unique opportunity for boards of directors to restructure CEO compensation packages. Consequently, changes and/or adjustments to CEO compensation packages under such circumstances can prove informative to the ongoing debate regarding CEO compensation. This paper investigates the nature of CEO compensation by exploring what happens to such compensation when a management turnover event takes place. Specifically, I examine CEO compensation levels and pay-performance sensitivity for incoming and outgoing CEOs involved in turnover events at public companies in the United States. My main findings are as follows: (1) incoming CEOs are paid as much as or more than those they replace, (2) outsider replacements are paid more than their predecessors even after controlling for education and skills, and (3) CEOs who are forced out are not paid differently from those who replace them, while CEOs who leave voluntarily are paid significantly less than their replacements. Further analysis reveals that proxies for managerial power including CEO tenure, CEO centrality, founder status, and high CEO ownership cannot explain these results. Overall, these findings are difficult to reconcile with the view that managerial power is the primary determinant of CEO compensation