Executive Compensation Limits and Executive Turnover

Executive Compensation Limits and Executive Turnover

We explore the consequences of limiting executive pay on voluntary executive turnover by exploiting a Chinese government policy restricting executive pay at a subset of firms. Affected firms experience an increase in voluntary executive turnover, with executives increasingly moving to firms not boun...

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Bibliographic Details
Published in:Management science Vol. 70; no. 4; pp. 2382 - 2405
Main Authors: Nanda, Vikram, Silveri, Sabatino (Dino), Wang, Kun, Zhao, Le
Format: Journal Article
Language:English
Published: Linthicum INFORMS 01-04-2024
Institute for Operations Research and the Management Sciences
Subjects:
CEO compensation
Companies
Compensation
corporate governance
Employee turnover
Executive compensation
Executives
managerial incentives
pay-for-performance
Public policy
regulation
Stockholders
turnover
Value
Wages & salaries
China
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Summary:We explore the consequences of limiting executive pay on voluntary executive turnover by exploiting a Chinese government policy restricting executive pay at a subset of firms. Affected firms experience an increase in voluntary executive turnover, with executives increasingly moving to firms not bound by the pay policy. Executives that leave are of higher quality as suggested by their stronger stock and accounting performance in the year prior to the turnover. Affected firms suffer firm value losses, especially when talented executives leave. Our findings demonstrate the importance of compensation contracts in retaining executives and suggest a need for regulatory caution, since mandated constraints aimed at trying to “fix” executive pay can hurt firm value and ultimately, hurt shareholders. This paper was accepted by Suraj Srinivasan, accounting. Funding: S. Silveri acknowledges research support in the form of a summer research grant from the Fogelman College of Business and Economics at the University of Memphis. This research support does not imply endorsement of the research results by either Fogelman College or the University of Memphis. K. Wang is grateful for the financial support provided by the Tsinghua University Initiative Scientific Research Program and the research project of the Institute for State-Owned Enterprises, Tsinghua University. L. Zhao is grateful for the financial support provided by the Asia Research Center in Nankai University [Project AS2206]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4812 .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2023.4812