Performance Pay, CEO Dismissal and the Dual Role of Takeovers

We propose that the takeover market mitigates agency conicts by creating acquisition opportunities for successful managers, allowing shareholders to reduce monetary incentives. As a consequence, shareholders commit to \u85nance pro\u85table as well as some unpro\u85table takeovers. While board interference and takeovers are substitutes, their joint impact on managerial turnover is multifaceted: In \u85rms with strong boards, turnover and performance pay are non-monotonic in the in-tensity of the takeover threat. In \u85rms with weak boards, turnover (performance pay) increases (decreases) with the intensity of the takeover threat. An externality between rmschoices of governance arrangements arises. In equilibrium there is excessive board interference which forces all \u85rms to pay higher compensation