CEO Severance Agreements: A Theoretical Examination and Research Agenda

Abstract

CEO severance has captured the attention of a wide array of audiences, yet it remains largely unexplored by management scholars. In this article we offer a rigorous theoretical examination of CEO severance with the goal of developing a foundation for a systematic research agenda. In particular, we consider if, and how, severance agreements can be effective in serving the interests of both CEOs and shareholders. We argue that severance agreements have potential value as both an executive recruitment and a governance tool but that the way they are conventionally structured undermines the value shareholders realize from them. The implications of structure have been almost entirely overlooked by scholars, perhaps because the influence of compensation consultants has left little variance in how severance agreements are implemented across firms. We address this gap by theorizing about how severance agreements could be structured to effectively generate value for executives and shareholders. To do this, we introduce a categorization of key dimensions of CEO severance agreements and consider how each of these dimensions can be structured to facilitate CEO recruitment while simultaneously mitigating future governance problems. Our propositions offer new opportunities for governance and compensation scholars to link CEO severance agreements to important organizational outcomes.

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