Why are CEOs paid severance pay after they leave firms?

What is it about?

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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