Show Summary Details

Page of

PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, BUSINESS AND MANAGEMENT (business.oxfordre.com). (c) Oxford University Press USA, 2016. All Rights Reserved. Personal use only; commercial use is strictly prohibited. Please see applicable Privacy Policy and Legal Notice (for details see Privacy Policy).

date: 20 November 2017

Executive Severance Agreements: Making Sense of an Emerging, Yet Fragmented, Research Field

Summary and Keywords

Scholars have devoted significant attention to understanding the determinants and consequences of executive compensation. Yet, one form of compensation, executive severance agreements, has flown under the radar. Severance agreements specify the expected payments and benefits promised executives, upon voluntary or involuntary termination. Although these agreements are popular among executives, critics continually question their worth. Yet severance agreements potentially offer three important (but less readily recognized) strategic benefits. First, severance agreements are viewed as a means of mitigating the potential risks associated with job changes; thus, they can serve as a recruitment tool to attract top executive talent. Second, because severance agreements guarantee executives previously specified compensation in the event of termination, they can help limit the downside risk naturally risk-averse executives face, facilitating executive-shareholder interest alignment. Third, severance agreements can aid in firm exit, as executives and directors are likely to be more open to termination, in the presence of adequate protection against the downside.

Severance agreements can contain provisions for ten possible termination events. Three events refer to change in control (CIC), which occurs under a change in ownership. These are (1) CIC without termination, (2) CIC with termination without cause, and (3) CIC with termination for cause. Cause is generally defined by events such as felony, fraud, embezzlement, neglect of duties, or violation of noncompete provisions. Additional events include (4) voluntary retirement, (5) resignation without good reason, (6) voluntary termination for good reason, (7) involuntary termination without cause, (8) involuntary termination with cause, (9) death, and (10) disability. Voluntary retirement and resignation without good reason occurs when CEOs either retire or leave under their own volition, and voluntary termination with good reason occurs in response to changes in employment terms (e.g., relocation of headquarters). Involuntary termination refers to termination due to any reason not listed above and is often triggered by unsatisfactory performance.

Although some prior work has addressed the antecedents, consequences, and moderators of severance, the findings from this literature remain unclear, as many of the results are mixed. Future severance scholars have the opportunity to further clarify these relationships by addressing how severance agreements can help firms attract, align the interests of, and facilitate the exit of executives.

Keywords: severance agreements, executive compensation, golden parachutes, employment agreements, termination

A Severance Review

Scholars from a variety of disciplines have devoted significant attention to understanding the determinants and consequences of executive compensation (Devers, Cannella, Reilly, & Yoder, 2007). In fact, a number of reviews and meta-analyses have already been published on the topic (e.g., Devers et al., 2007; Gomez-Mejia & Wiseman, 1997; Tosi, Werner, Katz, & Gomez-Mejia, 2000). Thus, we know a lot about executive compensation, which defined broadly includes bonuses, stock options, restricted stock, and incentives. However, one form of executive compensation, executive severance agreements, has flown under the radar.

Nonetheless, executive severance agreements are beginning to garner increasing interest, both within the business press and academic communities. Unfortunately, the fragmented nature of this inquiry provides a limited understanding of these agreements. Specifically, although executive severance comes in many shapes and sizes, these agreements generally specify the expected payments and benefits promised executives, upon voluntary or involuntary termination. The frequency with which such agreements appear has grown steadily since the 1980s (Green, 2013; McGregor, 2014). Indeed, over 80% of CEOs have some form of termination guarantee (Cowen, King, & Marcel, 2016). More importantly, the severance payments these agreements promise are far from trivial. The average guaranteed severance payout for CEOs of S&P 500 firms is $29.7 million for termination following a change in control (firm takeover) and $16.4 million for involuntary dismissal (most often resulting from poor performance).1

While severance agreements are popular among executives, the press is rife with serious questions about their worth. The most vocal critics impugn severance agreements as rewards for failure, as they often allow outgoing executives to depart with large payouts in hand, when they or their firms have performed poorly (Bebchuk & Fried, 2004; Dash, 2007). For example, in 2010 shareholders and activists were outraged that Hewlett-Packard CEO Mark Hurd would receive a $40 million severance payment for his board pressured resignation, following several ethical violations (Waters, 2010). Further, after Pfizer CEO Hank McKinnel resigned in 2006, and received a severance payout of $188 million, shareholders sponsored a plane to fly over the annual meeting with the banner, “Give it Back, Hank!” (Baratz, 2013).

Despite this outrage, severance agreements potentially offer important, but less readily recognized, strategic benefits. As we explain, these prospective benefits fall into three broad categories: (1) attracting executive talent, (2) aligning managerial interests, and (3) facilitating firm exit.

Attracting Executive Talent

Some proponents argue severance agreements can serve as a recruitment tool to attract top executive talent (Cowen et al., 2016). For example, a fair amount of ambiguity often exists regarding the fit between executives and new job demands (Allgood & Farrell, 2003; Zhang, 2008). Thus, for executives considering job offers, the threat of dismissal and the subsequent adverse financial, human, and social capital consequences can generate (often high) perceptions of employment and compensation risk (Larraza-Kintana, Wiseman, Gomez-Mejia, & Welbourne, 2007; Semadeni, Cannella, Fraser, & Lee, 2008; Wiesenfeld, Wurthmann, & Hambrick, 2008). The greater the perceived employment and compensation risk, the more likely highly qualified candidates will decline offers. Severance agreements are viewed as a means of mitigating those potential risks, by reducing at least a portion of the downside potential associated with job changes.

Aligning Managerial Interests

Advocates propose that severance agreements can also have positive effects, post-hire. Specifically, as noted above, because they guarantee executives previously specified compensation in the event of termination, severance agreements can help limit the downside risk naturally risk-averse executives face (Almazan & Suarez, 2003; Singh & Harianto, 1989a). Scholars argue that downside protection discourages risk aversion. Thus, consistent with agency theory logic, severance agreements should facilitate executive-shareholder interest alignment. For example, involuntary termination agreements may allow executives to reveal negative information that they may be more inclined to conceal or invest in risky yet potentially valuable firm projects (van Dalsem, 2010). In addition, change-in-control agreements may render CEOs less resistant to takeovers that may benefit shareholders (Singh & Harianto, 1989a). In sum, some argue that severance agreements have the potential to align executives’ interests with those of shareholders (Rau & Xu, 2013).

Facilitating Firm Exit

Finally, severance agreements are also argued to facilitate both voluntary and involuntary executive exit (Almazan & Suarez, 2003; Goldman & Huang, 2015). Specifically, some have argued that in situations where voluntary or involuntary termination is desired, executives and directors are more open to termination, in the presence of severance agreements that provide adequate downside protection (Inderst & Mueller, 2010; van Dalsem, 2009, 2010). Thus, board members may be willing to dismiss an executive with a severance package, as it can ameliorate the cost of dismissal. Relatedly, the existence of a severance package lessens the possibility of long, drawn-out negotiations during a dismissal effort. Overall, heavy criticism notwithstanding, severance agreements appear to have the potential for beneficial pre- and post-hire effects for executives, firms, and investors.

Scholars began focusing attention on severance in the 1980s. However, in light of concerns about inflated top executive compensation, and the financial crisis of 2007, academic interest has recently surged. This outpouring of attention has produced thought-provoking work on a variety of subtopics and from a diversity of perspectives. Nevertheless, as is the case with most emerging research areas, although this literature continues to rapidly grow, it is quite broad and fragmented. Thus, no unifying theoretical or conceptual thread exists to synthesize important contributions across subtopics and perspectives. As a result, scholars and practitioners are left to make sense of its disjointed nature, which inhibits advancement of this nascent but important line of research. Thus, a deeper understanding of severance holds high relevance for management theory and practice.

For example, one emerging issue highlights this relevance. Specifically, recent research shows that female CEOs receive larger severance agreements than male CEOs, perhaps as a means of reducing their higher termination risk and post-termination employability concerns (Klein, Chaigneau, & Devers, 2015). However, whether female executives demand more severance or directors assume they require it is unclear. In addition, we know little about whether and how severance impacts other demographic minorities, or those that differ in terms of cultural (e.g., collectivistic), or cognitive (e.g., core-self-evaluation, promotion or prevention orientation, etc.) dimensions. Given the increasing pressures to increase diversity in TMTs, the CEO office, and on corporate boards, our knowledge gap is notable since it is important to understand the concerns of these diverse leaders and how firms can enhance their ability to recruit them.

Taking into consideration the increasing emphasis on effective corporate governance, including as explained above attracting minority members to top management roles, it is important for management scholars to develop a more comprehensive understanding of this common, yet as compared to executive compensation, much less visible aspect of executives’ employment contracts. Accordingly, the body of severance research was reviewed by searching EBSCOhost, ProQuest, JSTOR, Web of Science, and Google Scholar using a broad base of severance-related keywords (e.g., “agreement,” “contract,” “pay,” or “payment” combined with each of the following: “severance,” “separation,” “change-in-control,” “termination,” “golden parachutes,” and “golden handshakes”), in the domains of economics, accounting, law, finance, sociology, and management. In addition, we searched through the references of all of the articles we found for additional papers that were relevant and also searched through any articles that cited the most relevant papers. We then classified existing theory and evidence into an organizing framework presented in Figure 1.

Executive Severance Agreements: Making Sense of an Emerging, Yet Fragmented, Research FieldClick to view larger

Figure 1. Framework of Executive Severance Agreements: Antecedents, Consequences, and Moderators.

As we describe below, this review allows us to better clarify the concept of severance, organize and integrate prior findings, identify emerging research opportunities, and develop a foundation for facilitating new research directions, as they relate to management theory and practice.

Review

Although severance is often conceptualized as a guarantee for change in control or involuntary termination, such agreements can contain provisions for several termination events. Adding further complexity, although some severance scholars focus on original (pre-hire) severance agreements (e.g., Rusticus, 2006), others examine severance agreements at different times during a CEO’s tenure, as the value of these agreements tends to move with changes to CEO compensation (e.g., Gillan, Hartzell, & Parrino, 2009). Yet another strand of work focuses on separation pay (at-termination payouts), which often differs significantly from original severance guarantees (Goldman & Huang, 2015; Yermack, 2006).

In addition, some research explores the antecedents of severance agreements (e.g., Agrawal & Knoeber, 1998; Rau & Xu, 2013), while other work focuses on their consequences (e.g., Buchholtz & Ribben, 1994; Fich, Tran, & Walking, 2013). Perhaps more importantly, however, although many studies examine the utility of severance from the firm perspective (e.g., Bodolica & Spraggon, 2009), others view its utility from the perspective of executives (e.g., Klein et al., 2015), leaving results difficult to reconcile. Thus, it remains unclear whether severance agreements actually exhibit their proposed effects on executive attraction, interest alignment, and firm exit.

This entry’s review begins by differentiating among the individual termination events often included in executive severance agreements. After these important clarifications, the article draws on a framework that classifies research into antecedents, consequences, and moderators, to summarize what is currently known about severance agreements and articulate what important gaps remain in the severance literature. The article then gives a brief overview of a multidisciplinary research agenda that lays the foundation for advancing the severance literature: by better linking theory and evidence on severance to the three strategic benefits discussed earlier. This entry also discusses innovative research methods capable of addressing these gaps.

Termination Events

Even though change-in-control (CIC) and involuntary termination (IT) are the most widespread, controversial, and studied forms of severance, our broad review of proxy statements revealed that severance agreements can, and often do, cover many additional forms of termination (termination events). Thus, severance agreements include provisions that specify the promised payment for all or some of the following ten possible termination events. Three events refer to change in control (CIC), which occurs under a change in ownership. These are (1) CIC without termination, (2) CIC with termination without cause, and (3) CIC with termination for cause. Cause is generally defined by events such as felony, fraud, embezzlement, neglect of duties, or violation of noncompete provisions (Schwab & Thomas, 2006). Additional events include (4) voluntary retirement, (5) resignation without good reason, (6) voluntary termination for good reason, (7) involuntary turnover without cause, (8) involuntary turnover with cause, (9) death, and (10) disability. Voluntary retirement and resignation without good reason occurs when CEOs either retire or leave under their own volition, and voluntary termination with good reason occurs in response to changes in employment terms (e.g., relocation of headquarters) (Bodolica & Spraggon, 2009). Involuntary turnover refers to termination due to any reason not listed above and is often triggered by unsatisfactory performance.

These termination events differ in a number of important ways. More specifically, as summarized in Table 1, are some ideas on how these events could differ: whether they are related to performance, whether they are under the CEO’s control, whether they are under the board’s control, and their likelihood of occurrence as perceived by the CEO. Yet, no study we are aware of has explored all of the different termination events or developed theory based on the differences between the types of severance events. Accordingly, future research should address how the relationship between certain CEO and firm characteristics and severance may depend on these differences.

Table 1. Comparison of Events in CEO Severance Agreements

Event

CIC without termination

CIC with termination

CIC for cause

Voluntary retirement

Resignation

Voluntary termination

Involuntary termination without cause

Involuntary termination with cause

Disability

Death

Definition

Occurs following an acquisition resulting in change in CEO without termination.

Occurs following an acquisition resulting in termination of the CEO.

Occurs following an acquisition, which was due to cause events, i.e. felony, fraud, embezzlement, neglect of duties, violation of non-compete provisions.

Termination of contract due to retirement.

Occurs when a CEO decides to leave.

Occurs when a CEO decides to leave due to the company changing the terms of the agreement.

Termination due to any other reason, often due to unsatisfactory performance.

Termination due to events such as felony, fraud, embezzlement, neglect of duties, violation of non-compete provisions.

Termination of contract due to disability.

Termination of contract due to death.

Performance-related

Yes

Yes

Yes

No

No

No

Yes

Yes

No

No

Under the CEO’s control

No

No

Yes

Yes

Yes

Yes

No

Yes

No

No

Under the board’s control

Sometimes

Sometimes

Sometimes

No

No

No

Yes

Yes

No

No

Perception of likelihood of occurring

Possible

Possible

Unlikely

Possible

Possible

Possible

Possible

Unlikely

Unlikely

Unlikely

Table 2 presents the average guaranteed value of severance for each of the different termination events for Fortune 500 and S&P 500 CEOs. These data were collected by obtaining each firm’s proxy statement, filed in 2010 or 2011 depending on the date of their Annual Shareholder Meeting, from the SEC website. Then a search was conducted for guaranteed severance pay information for each CEO and the total dollar value of guaranteed severance pay was coded for each of the possible ten termination events reported. Some firms listed this data in a table; for these firms, the total value was simply coded. When this information was not directly provided, these values were calculated using text descriptions and compensation summary tables.

Table 2. Severance for 2010 Fortune 500 and S&P 500 CEOs

Variables

Percent of CEOs with the provision

Estimated contractual value

CIC without termination

15.9%

$2,245,975

CIC with termination

84.6%

$22,949,321

CIC with termination for cause

0.4%

$60,470

Voluntary retirement

26.1%

$3,913,201

Resignation without good reason

5.5%

$510,228

Voluntary termination with good reason

35.3%

$5,785,123

Involuntary termination without cause

66.2%

$11,297,095

Involuntary termination with cause

12.8%

$701,882

Disability

58.0%

$11,180,571

Death

63.3%

$12,835,923

As seen in Table 2, CEO severance agreements containing CIC with termination without cause and involuntary termination without cause were common, with 84.6% and 66.2% of the CEOs having such agreements, respectively. The other termination events for which a majority of CEOs had a severance agreement are disability and death, 58.3% and 63.3%, respectively. CEOs were less likely to have agreements containing provisions for the other six events. For example, only 15.9% had CIC without termination, 0.4% had CIC with termination for cause, 26.1% had voluntary retirement, 5.5% had resignation without good reason, 35.3% of CEOs had voluntary termination with good reason provisions, and 12.8% had involuntary termination with cause. The guaranteed payments for these different severance provisions also varied significantly. For instance, the four events that were the most common are also the largest: CEOs were guaranteed $11.3 million on average for involuntary termination without cause, $22.9 million on average for CIC with termination without cause, $11.2 million for disability, and $12.8 million for death. The values CEOs were guaranteed for the other six events were much smaller: $2.2 million for CIC without termination, $60.4 thousand for CIC for cause, $3.9 million for retirement, $510.2 thousand for resignation without good reason, $5.8 million for voluntary termination with good reason, and $701.9 thousand for involuntary termination with cause.

Adding to the complexity of the construct are the number of terms that refer to some form of severance in various literatures and the inconsistencies regarding how they are defined. First, some researchers have used the term “severance agreements” to refer only to the voluntary and involuntary termination provisions (e.g., Bodolica & Spraggon, 2009; Cowen et al., 2016; Peters & Wagner, 2014), whereas others have used it to include all termination and CIC provisions (e.g., Almazan & Suarez, 2003; Dalton, Daily, & Kesner, 1993; Rau & Xu, 2013). We focus on the latter definition and include all provisions in an executive’s employment contract related to the termination of his or her contract. Second, some severance provisions are commonly referred to under different terms. For example, CIC agreements are often called “golden parachutes,” whereas involuntary termination agreements are called “golden handshakes.” Further, agreements on the payments that executives receive as they are being terminated are sometimes call “separation pay agreements,” while “discretionary severance pay” is the difference between the severance agreement and the severance payout (Goldman & Huang, 2015). It is important to note that although severance agreements list the minimum terms for this payout, executives often receive larger awards (in a variety of forms) at termination than what is specified in the agreement (Goldman & Huang, 2015; Yermack, 2006), likely to facilitate expedient transitions. Last, the term “sunset provisions” refers to the vesting, forfeiture, and expiration provisions for equity grants for executives who leave the firm (Dahiya & Yermack, 2008).

As noted above, although change-in-control (CIC) and involuntary termination (IT) are the most common and studied severance forms, many others exist. However, we know little about these other types of severance. As a result, we encourage research that begins to shed light on the roles these other forms of severance may play in executive attraction, interest alignment, and exit.

Antecedents

Some scholars exploring the antecedents of severance agreements have sought to determine what influences both their award and size (Cowen et al., 2016). However, the findings are complex. For example, researchers have found that smaller firms (which are more likely to face takeovers) and high risk and poorly performing firms, are more likely to award severance agreements than their counterparts (Agrawal & Knoeber, 1998; Rau & Xu, 2013; van Dalsem, 2010). However, other evidence has shown that larger firms provide greater guaranteed payouts to executives than do smaller firms (Rusticus, 2006). Further, externally appointed executives are both more likely to have a severance agreement and receive larger guaranteed payouts, relative to internal appointees (Gillan et al., 2009; Rusticus, 2006).

In addition, Davis and Greve (1997) found that firms’ adoption of CIC agreements diffused similarly across firms in close proximity. However, Fiss, Kennedy, and Davis (2012) showed that shareholder and acquirer lawsuits and public visibility reduced the extensiveness of agreements. Further, although some suggest that managerial power affects severance awards (Bebchuk & Fried, 2004), unfortunately, the evidence here is mixed (Singh & Harianto, 1989a; Wade, O’Reilly, & Chandratat, 1990). On an intriguing note, although approximately 80% of CEOs have some form of a severance agreement, 20% of firms have resisted adopting this practice (Cowen et al., 2016). Nevertheless, little is known about why some firms choose a strategy of resistance.

Additionally, it is clear from past research that some executive jobs are more challenging than others (Hambrick, Finkelstein, & Mooney, 2005). More specifically, this research has argued that while some executives “lead companies that have well-fortified (sometimes even monopoly) positions, and are supported by highly capable colleagues,” “other executives have none of these comforts” (Hambrick et al., 2005, p. 472). Accordingly, these authors proposed the construct of executive job demands, which they defined as the degree to which an executive’s job is difficult or challenging. It is plausible that in order for firms to attract executives to take roles with significant job demands, they need to offer greater insurance in the form of severance. Future studies should explore whether executives with higher job demands receive greater severance and, further, how job demands interact with gender and other demographic characteristics to affect guaranteed severance pay.

Last, the majority of severance research relies on archival data, which limits our understanding of the cognitive and behavioral processes that underlie severance initiation. This article proposes that alternative methods (e.g., experimental, policy capturing, survey-based research, interviews, etc.) can help advance this work. However, such examinations are virtually absent in the severance literature. Therefore, although prior research has yielded many insights, this entry contends that the management field has not yet effectively integrated these findings. Thus, important questions regarding antecedents remain.

Consequences

As noted, advocates argue that severance agreements have important effects on attraction, interest alignment, and firm exit. However, whether severance agreements achieve these consequences is unclear, as the results are mixed. For example, Lambert and Larcker (1985) showed that CIC adoption positively influenced investor reactions, whereas Mogavero and Toyne (1995) found a negative effect. Born, Trahan, and Faria (1993) showed that CIC agreements had no effect on tender offer success; however, Bebchuk, Cohen, and Wang (2014) found that such agreements were associated with higher than expected acquisition premiums. Additionally, Chen, Cheng, Lo, and Wang (2012) demonstrated that involuntary termination agreements appeared to encourage CEOs to take a long-term view and refrain from reducing R&D expenditures; while Huang (2011) showed that involuntary CEO termination agreements motivated overinvestment in short-term risky projects that ultimately increased share price volatility. Moreover, research on discretionary involuntary termination payments found that shareholders react negatively to voluntary discretionary payments, yet react positively to involuntary discretionary payments (Goldman & Huang, 2015; Yermack, 2006).

In addition, although Klein et al. (2015) found that incoming female CEOs receive larger guaranteed severance pay than incoming male CEOs, given that the value of CEOs’ severance agreements are typically linked to their annual compensation, it is unclear whether this severance gap persists over time. More specifically, the annual compensation of male CEOs tends to rise faster than female CEOs, especially with positive firm performance (Munoz-Bullon, 2010; Albanesi, Olivetti, & Prados, 2015). Thus, it is plausible that the value of male CEOs’ guaranteed severance pay catches up with (or even surpasses) that of female CEOs’, quite early in their tenures. As a consequence, if severance does exhibit post-hire effects, these effects may wax and wane with gender-based value differences over time. This article suggests that this is an important, yet unexamined, effect of severance that scholars should further explore.

Furthermore, excepting Singh and Harianto (1989b) and Rau and Xu (2013), severance research focuses almost exclusively on CEOs. As a result, no work has examined within-TMT severance differences, or what we term the severance gap (CEO severance compared to other TMT members’ severance). Evidence shows that pay differences can exhibit important influences on behavioral and firm outcomes, such as acquisition activity and acquirer performance (Steinbach, Holmes, Holcomb, Cannella, & Devers, 2017). It follows, then, that a severance gap may also impact TMT inputs and outcomes.

The structure or composition of severance may also have important consequences on executives. Indeed, for each severance event, executives may receive a combination of compensation forms, such as, base salary, lump-sum cash, vested and unvested stock and stock options, insurance coverage, pension plan acceleration, among others (Zhao, 2013). Thus, diving deeper into the composition of severance packages may offer numerous potential fruitful insights. First, certain components of severance, for example, cash versus stock, may act differently as an attraction, incentive, or monitoring device. Indeed, it is unclear whether certain parts of severance packages make it easier to attract high status CEOs or TMT members, or help boards align executives’ interests with shareholders. Further, striving to understand the micro-foundations of severance packages may help scholars simultaneously marry resource-based perspectives with executive compensation perspectives. Recent work on the micro-foundations of resources (e.g., human capital) has shown fungibility to be important in maximizing managers’ ability to utilize their experience to improve performance (Mannor, Shamsie, & Conlon, 2016). Thus, parsing out the composition of severance packages and why and how they are structured will lead to a better understanding of how the micro-foundations of a particular resource, severance, offer CEOs more fungibility, influence firms’ ability to monitor executives, and create value for shareholders (Cowen et al., 2016).

Finally, although some scholars have shown that the presence of severance agreements is associated with executive turnover, little is known about the mechanisms driving this result (Huang, 2011; Rusticus, 2006; van Dalsem, 2009). Thus, while many factors may influence severance-related consequences, we have yet to determine the relative importance of each factor.

Moderators

Moderating variables may also hold potential for helping reconcile the mixed results in this research (Bodolica & Spraggon, 2009). For instance, approximately 40% of CEOs depart with separation pay amounts that exceed their agreement terms by an average of $8 million (Goldman & Huang, 2015). However, the reasons are largely unknown. Although few studies have addressed why firms provide discretionary separation pay, this work suggests that a number of factors may impact the relationship between original agreements and separation pay. For instance, Goldman and Huang (2015) showed that weak governance and noncompete clauses affected discretionary separation pay, suggesting these factors condition the relationship between original severance agreements and separation pay values. Future studies should investigate how social relationships, board interlocks, or even the similarity between terminated executives and directors may also play key moderating roles.

Further, this article suggests that delving into the decision dynamics influencing how discretionary separation pay is determined may offer a fruitful avenue to understanding decision making in the upper echelon. As such, this would involve accounting for both internal and external forces. For instance, it may simply be an unwritten rule amongst some directors not to question CEO pay decisions, as doing so could result in social ostracization. Contrastingly, internal coalitions within the board and power dynamics between the executive and firm directors may also play a large role in determining discretionary pay. In fact, recent work suggests the relationship between internal coalitions and external logics (e.g., industry norms or beliefs) can interact to influence important strategic decisions (Greve & Zhang, 2017). Using this insight, it would be interesting to explore how boards of directors and external logics of severance interact to influence discretionary severance pay.

Finally, little is known about whether other compensation forms (e.g., stock options) impact the relationships among severance agreements and important outcomes. Future research should explore these and other potential moderators in an attempt to uncover if and when severance agreements actually achieve their expected benefits. In addition, little is known about how severance may act as a moderator for other forms of compensation and important outcomes. Lefanowicz, Robinson, and Smith (2000) found an exception, which was that executive incentives are positively associated with target acquisition returns, but change-in-control payments mitigate this influence. Scholars should be encouraged to continue exploring how severance may strengthen or weaken the relationship between compensation and individual- and firm-level outcomes.

Conclusion

Although, relative to executive compensation, executive severance has flown under the radar for years, recent concerns about inflated executive compensation and the 2007 financial crisis have pushed it to the forefront. Nevertheless, we have yet to develop a comprehensive understanding of this important phenomenon. Thus, this article contributes to the management field by developing a framework for organizing extant research, integrating the findings of this body of work, and identifying fruitful areas for future research. In sum, this article will help shift the current conversation from critiquing the award of or level of severance pay to a broader more productive set of questions, including whether and how severance agreements help firms attract, align the interests of, and facilitate the exit of executives.

References

Agrawal, A., & Knoeber, C. R. (1998). Managerial compensation and the threat of takeover. Journal of Financial Economics, 47(2), 219–239.Find this resource:

Albanesi, S., Olivetti, C., & Prados, M. J. (2015). Gender and dynamic agency: Theory and evidence on the compensation of top executives. Federal Reserve Bank of New York Staff Reports, 718.Find this resource:

Allgood, S., & Farrell, K. A. (2003). The match between CEO and firm. Journal of Business, 76(2), 317–341.Find this resource:

Almazan, A., & Suarez, J. (2003). Entrenchment and severance pay in optimal governance structures. Journal of Finance, 58(2), 519–547.Find this resource:

Baratz, D. (2013, March 18). Top 10 CEO severance packages. Money Morning.Find this resource:

Bebchuk, L., Cohen, A., & Wang, C. C. Y. (2014). Golden parachutes and the wealth of shareholders. Journal of Corporate Finance, 25, 140–154.Find this resource:

Bebchuk, L. A., & Fried, J. M. (2004). Pay without performance, the unfulfilled promise of executive compensation. Cambridge, MA: Harvard University Press.Find this resource:

Bodolica, V., & Spraggon, M. (2009). The implementation of special attributes of CEO compensation contracts around M&A transactions. Strategic Management Journal, 30(9), 985–1011.Find this resource:

Born, J. A., Trahan, E. A., & Faria, H. J. (1993). Golden parachutes: Interest aligners, management entrenchers, or takeover bid signals? Journal of Financial Research, 16(4), 299–308.Find this resource:

Buchholtz, A. K., & Ribbens, B. A. (1994). Role of chief executive officers in takeover resistance: Effects of CEO incentives and individual characteristics. Academy of Management Journal, 37(3), 554–579.Find this resource:

Chen, X., Cheng, Q., Lo, A. K., & Wang, X. (2012). Severance pay, employment agreement, and managerial short-termism. Working Paper, Singapore Management University.Find this resource:

Cowen, A., Wilcox-King, A., & Marcel, J. (2016). CEO severance agreements: A theoretical examination and research agenda. Academy of Management Review, 41, 151–169.Find this resource:

Dahiya, S., & Yermack, D. (2008). You can’t take it with you: Sunset provisions for equity compensation when managers retire, resign, or die. Journal of Corporate Finance, 14, 499–511.Find this resource:

Dalton, D. R., Daily, C. M., & Kesner, I. F. (1993). Executive severance agreements: Benefit or burglary? Academy of Management Perspective, 7(4), 69–76.Find this resource:

Dash, E. (2007, April 8). Has the exit sign ever looked so good? New York Times.Find this resource:

Davis, G. F., & Greve, H. R. (1997). Corporate elite networks and governance changes in the 1980s. American Journal of Sociology, 103(1), 1–37.Find this resource:

Devers, C. E., Cannella, A. A., Reilly, G. P., & Yoder, M. E. (2007). Executive compensation: A multidisciplinary review of recent developments. Journal of Management, 33, 1016–1072.Find this resource:

Fich, E. M., Tran, A. L., & Walking, R. A. (2013). On the importance of golden parachutes. Journal of Financial and Quantitative Analysis, 48(6), 1717–1753.Find this resource:

Fiss, P. C., Kennedy, M. T., & Davis, G. F. (2012). How golden parachutes unfolded: Diffusion and variation of a controversial practice. Organization Science, 23(4), 1077–1099.Find this resource:

Gillan, S. L., Hartzell, J. C., & Parrino, R. (2009). Explicit versus implicit contracts: Evidence from CEO employment agreements. Journal of Finance, 64(4), 1629–1655.Find this resource:

Goldman, E., & Huang, P. (2015). Contractual vs. actual severance pay following CEO turnover. Management Science, 61(5), 1108–1120.Find this resource:

Gomez-Mejia, L. R., & Wiseman, R. M. (1997). Reframing executive compensation: An assessment and outlook. Journal of Management, 23(3), 291–374.Find this resource:

Green, J. (2013, June 6). Jumbo severance packages for top CEOs are growing. Bloomberg Business.Find this resource:

Greve, H., & Zhang, C. M. (2017). Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), 671–694.Find this resource:

Hambrick, D. C., Finkelstein, S., & Mooney, A. C. (2005). Executive job demands: New insights for explaining strategic decisions and leader behaviors. Academy of Management Review, 30(3), 472–491.Find this resource:

Huang, P. (2011). Marital prenups? A Look at CEO severance agreements, Working paper, SSRN.Find this resource:

Inderst, R., & Mueller, H. M. (2010). CEO replacement under private information. Review of Financial Studies, 23(8), 2935–2969.Find this resource:

Klein, F. B., Chaigneau, P., & Devers, C. E. (2015). The gender gap reversed: Gender and CEOs’ original severance agreement. Paper presented at the annual meeting of the Academy of Management, Vancouver, Canada.Find this resource:

Lambert, R. A., & Larcker, D. F. (1985). Golden parachutes, executive decision-making, and shareholder wealth. Journal of Accounting and Economics, 7, 179–203.Find this resource:

Larraza-Kintana, M., Wiseman, R. M., Gomez-Mejia, L. R., & Welbourne, T. M. (2007). Disentangling compensation and employment risks using the behavioral agency model. Strategic Management Journal, 28, 1001–1019.Find this resource:

Lefanowicz, C. E., Robinson, J. R., & Smith, R. (2000). Golden parachutes and managerial incentives in corporate acquisitions: Evidence from the 1980s and 1990s. Journal of Corporate Finance, 6, 215–239.Find this resource:

Mannor, M. J., Shamsie, J., & Conlon, D. E. (2016). Does experience help or hinder top managers? Working with different types of resources in Hollywood. Strategic Management Journal, 37, 1330–1340.Find this resource:

McGregor, J. (2014, March 26). Dismantling CEOs’ golden parachutes. Washington Post, March 26.Find this resource:

Mogavero, D. J., & Toyne, M. F. (1995). The impact of golden parachutes on Fortune 500 stock returns: A reexamination of the evidence. Quarterly Journal of Business and Economics, 34(4), 30–38.Find this resource:

Munoz-Bullon, F. (2010). Gender-compensation differences among high-level executives in the United States. Industrial Relations, 49(3), 346–370.Find this resource:

Peters, F. S., & Wagner, F. S. (2014). The executive turnover risk premium. Journal of Finance, 69(4), 1529–1563.Find this resource:

Rau, P. R., & Xu, J. (2013). How do ex ante severance pay contracts fit into optimal executive incentive schemes? Journal of Accounting Research, 51(3), 631–671.Find this resource:

Rusticus, T. O. (2006). Executive severance agreements. Working Paper, Wharton.Find this resource:

Schwab, S. J., & Thomas, R. S. (2006). Empirical analysis of CEO employment contracts: What do top executives bargain for? Washington and Lee Law Review, 63, 231–270.Find this resource:

Semadeni, M., Cannella, A. A., Fraser, D. R., & Lee, D. S. (2008). Fight or flight: Managing stigma in executive careers. Strategic Management Journal, 29, 557–567.Find this resource:

Singh, H., & Harianto, F. (1989a). Management-board relationships, takeover risk, and the adoption of golden parachutes. Academy of Management Journal, 32(1), 7–24.Find this resource:

Singh, H., & Harianto, F. (1989b). Top management tenure, corporate ownership structure and the magnitude of golden parachutes. Strategic Management Journal, 10(S1), 143–156.Find this resource:

Smale, A., & Miller, C. C. (2015, March 6). Germany sets gender quota in boardrooms. New York Times.Find this resource:

Steinbach, A., Holmes, R. M, Holcomb, T. R., Cannella, A. A., & Devers, C. E. (2017). Top management team incentive heterogeneity, strategic investment behavior, and performance: A contingency theory of incentive alignment. Strategic Management Journal, 38(8), 1701–1720.Find this resource:

Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). The determinants of CEO compensation: A meta-analysis of firm size and performance. Journal of Management, 26(2), 301–339.Find this resource:

van Dalsem, S. (2009). Maturity policies of CEO severance contracts and forced internal turnover. Managerial Finance, 35(9), 772–783.Find this resource:

van Dalsem, S. (2010). Determinants of CEO severance contracts and their components and the effects of severance contracts on executive turnover. Journal of Economics and Business, 62(4), 257–272.Find this resource:

Wade, J., O’Reilly, C. A., & Chandratat, I. (1990). Golden parachutes: CEOs and the exercise of social influence. Administrative Science Quarterly, 35(4), 587–603.Find this resource:

Waters, R. (2010, August 10). Loophole puts HP under pressure to give Hurd $40m severance pay. FT.com.Find this resource:

Wiesenfeld, B. M., Wurthmann, K. A., & Hambrick, D. C. (2008). The stigmatization and devaluation of elites associated with corporate failures: A process model. Academy of Management Review, 33(1), 231–251.Find this resource:

Yermack, D. (2006). Golden handshakes: Separation pay for retired and dismissed CEOs. Journal of Accounting and Economics, 41, 237–256.Find this resource:

Zhang, Y. (2008). Information asymmetry and the dismissal of newly appointed CEOs: An empirical investigation. Strategic Management Journal, 29, 859–872.Find this resource:

Zhao, J. (2013). Entrenchment or incentive? CEO employment contracts and acquisition decisions. Journal of Corporate Finance, 22, 124–152.Find this resource:

Notes:

(1.) ExecuComp data.