Pay Me Later: Inside Debt and Its Role in Managerial Compensation




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    • Both authors are at the Department of Finance, Stern School of Business, New York University. The authors are grateful for comments from participants in seminars at the Federal Reserve Bank of New York, Helsinki School of Economics, Ohio State University, Stockholm School of Economics, Temple University, and the 2006 American Finance Association Meetings in Boston, as well as Viral Acharya, Sreedhar Bharath, Rudi Fahlenbrach, Bill Greene, Kevin Hallock, Kewei Hou, Ira Kay, Hamid Mehran, Kevin Murphy, Mitch Petersen, Rob Stambaugh (the Editor), Sami Torstila, and James Vickery. Detailed comments by an anonymous referee on earlier drafts are deeply appreciated. Seshadri Ayalur and Hae Jin Chung provided excellent research assistance.


Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.