“Decoupling CEO Wealth and Firm Performance:The Case of Acquiring CEOs” by Kai LI
University of British Columbia
Corporate takeovers are a setting where the interests of managers and shareholders often diverge. We explore whether compensation policies in bidding firms counter or exacerbate this divergence by examining CEO pay and incentives around corporate takeovers. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off 70% of the time. In the years following mergers, CEOs of poorly performing firms receive substantial increases in option and stock grants that offset any effect of long-term underperformance on their wealth. As a result, the CEO’s pay and his overall wealth become insensitive to negative stock performance, but increase more than one for one with positive stock performance. The results imply that by undertaking a series of acquisitions, a CEO could effectively neutralize the sensitivity of his wealth to poor firm performance.