CEO Turnover and Compensation: An Empirical Investigation

Because CEO turnover events provide the board of directors with a unique opportunity to potentially completely restructure CEO compensation packages, changes to CEO compensation following a turnover event could prove to inform the ongoing debate regarding CEO compensation. This paper investigates what happens to CEO compensation when a turnover event occurs. 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.