CEO Compensation in Financially Distressed Firms: An Empirical Analysis




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    • Gilson is from Harvard Business School and Vetsuypens is from Southern Methodist University. This paper has benefited from the comments of Ed Altman, Chris Barry, Jim Brickley, Harry DeAngelo, Linda DeAngelo, Paul Healy, Cliff Holderness, Sherry Jarrell, Stacey Kole, Scott Lummer, Gordon Phillips, Michael Rebello, Richard Ruback, Dennis Sheehan, Richard Sloan, Rex Thompson, Seha Tinic, Peter Tufano, Karen Van Nuys, Jay Westbrook, Mark Zenner, seminar participants at Boston College, Georgetown University, Harvard Business School, MIT, the 1991 NBER Summer Institute Workshop on Corporate Finance, New York University, University of North Carolina, University of Oklahoma, University of Pittsburgh, Purdue University, University of Rochester, The Securities and Exchange Commission, University of Southern California, Texas A & M University, Texas Christian University, conference participants at the 1991 Financial Management Association Meetings and 1991 American Finance Association Meetings, and an anonymous referee and René Stulz (the editor). We are grateful to Kevin Murphy for providing us with some of his data. Financial support was provided by the Division of Research at the Harvard Business School (Gilson) and the Leo F. Corrigan Junior Fellowship at Southern Methodist University (Vetsuypens). Research assistance was provided by Joe Basset and Chris Williams.


This paper studies senior management compensation policy in 77 publicly traded firms that filed for bankruptcy or privately restructured their debt during 1981 to 1987. Almost one-third of all CEOs are replaced, and those who keep their jobs often experience large salary and bonus reductions. Newly appointed CEOs with ties to previous management are typically paid 35% less than the CEOs they replace. In contrast, outside replacement CEOs are typically paid 36% more than their predecessors, and are often compensated with stock options. On average, CEO wealth is significantly related to shareholder wealth after firms renegotiate their debt contracts. However, managers' compensation is sometimes explicitly tied to the value of creditors' claims.