What is it about?
Severance pay has attracted lots of attention in the popular press after CEOs who have been fired for poor performance collect large payouts on their way out of the door. In this article, we show that severance pay is part of an optimal contracting package offered to executives and it complements the incentives provided by stock and options in the pay package.
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Why is it important?
Executives are paid in many ways. Severance pay seems to be a type of payment that is unwarranted since it is paid after the executive leaves the organization and usually seems to have no incentive benefits. This article argues that severance pay is part of an optimal executive compensation scheme and is offered to executives ex ante to persuade them to take the job in the first place. It is only ex post that the severance pay might be appear unwarranted.
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This page is a summary of: How Do Ex Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?, Journal of Accounting Research, January 2013, Wiley, DOI: 10.1111/joar.12001.
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