Entrenchment and Severance Pay in Optimal Governance Structures
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- 21 March 2003
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 58 (2) , 519-547
- https://doi.org/10.1111/1540-6261.00536
Abstract
This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.Keywords
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