Measuring effects from CEO turnovers and incentive-based compensation on relative corporate performance : an empirical analysis examining the effects from CEO turnovers and CEO incentive-based compensation on firm performance in the years following the financial crisis of 2007-2008

Abstract

This thesis seeks to increase our understanding of performance-enhancing decisions of company boards, with a specific focus on CEO turnovers and compensation policies following financial shocks. Using a self-made set of data including 830 CEO turnovers from 726 companies from the S&P1500, the thesis includes complete analyses of effects both related to CEO turnovers, and the effects of providing incoming CEOs with incentive-based compensation early after employment. The effects from the compensation factors are firstly measured on the full sample using different regression techniques and time aspects. The effects are thereafter analyzed on two different samples. Low ownership CEOs and high ownership CEOs respectively. This in turn to see if the two samples are motivated differently to affect firm performance, and also if the low ownership CEOs are more motivated by receiving new equity grants than receiving other incentive-based compensation components. The performance of the relevant companies is measured using both accounting- and marketbased measures, in order to best explain the effects of the boards initiatives. Based on turnovers in 2010, I find that the EBITDA margin provides inverse relationships comparing pre-turnover to post-turnover performance, improving after the employment of the new CEO. The same relationship is found looking at the EBITDA margin for turnovers in 2012. ROE creates sustainable growth in the years post-turnover for turnovers in 2011, while ROA provides general improvement for turnovers in 2009 and 2012. I find that the fraction of option grants in incoming CEO compensation packages provides significant positive relationships to industry-adjusted ROA the following year in the sample. In other words, providing incoming CEOs with relatively more option grants, early after employment, seems to increase the return on assets for the sample companies included. I also find positive significant relationships between new stock grants for the CEOs and industry-adjusted priceto-book. Focusing on the low ownership CEOs, it seems that their already existing ownership in the firm has a negative effect on ROA. New stock grants for the low ownership CEOs are however associated with positive effects on the EBITDA margin. The high ownership sample is recognized by having positive effects from bonus, option awards and existing ownership.