The Role of Deferred Pay in Retaining Managerial Talent

• Main Authors: Gopalan, Radhakrishnan, HUANG, Sheng, Maharjan, Johan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Executive compensation; pay duration; talent retention; management turnover; Business; Corporate Finance; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4567; https://ink.library.smu.edu.sg/context/lkcsb_research/article/5566/viewcontent/RoleDefferedPayRetainingManagerialTalent_2014May.pdf
• Institution: Singapore Management University

We examine the role of deferred vesting of stock and option grants in reducing executive turnover. To the extent an executive forfeits all unvested stock and option grants if she leaves the firm, deferred vesting will increase the cost (to the executive) of early exit. Using pay Duration proposed in Gopalan, et al., (forthcoming) as a measure of the length of managerial pay, we find that CEOs and non-CEO executives with longer pay Duration are less likely to leave the firm voluntarily. Employing the vesting of a large prior-year stock/option grant as an instrument for Duration, we find the effect to be causal. CEOs with longer pay Duration are also less likely to experience a forced turnover and the sensitivity of forced CEO turnover to firm performance is significantly lower in firms that offer longer duration pay. Overall, our study highlights a strong link between compensation design and turnover for top executives.