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CEO Pensions: Disclosure, Rent Extraction, and Incentive Contracting
Joseph John Gerakos,
The Wharton School
ABSTRACT. CEOs often receive pensions that provide life annuities of up to 60% of final salary plus bonus. I investigate the extent to which pensions are rent extraction, or the result of incentive contracting. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide excess pension benefits, whether pensions are associated with CEO power and/or contracting determinants, and whether prior to retirement CEOs with pensions are more likely to manage earnings to increase final pension benefits than CEOs without pensions. Results provide some support for both views. However, economic contracting variables appear to explain pension benefit levels to a greater extent than CEO power. This suggests that although pensions can be used for rent extraction, the practice is limited. Results suggest that rent extraction can be detected using public disclosures, implying that recent SEC changes in disclosure requirements may have little effect on investors’ ability value pensions.
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