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An analysis of supplemental executive retirement plans : governance, incentive and risk-preference implications

By Pavlo Kalyta


Ambiguous disclosure of Supplemental Executive Retirement Plan (SERP) benefits makes them an attractive choice for CEOs with power over the board to extract rents. However, although SERPs are common and sizable, the research on determinants and consequences of SERPs is virtually absent. Using a historical sample of CEOs of S&P TSX60 firms, the study fills this gap. First, I examine whether the incidence and magnitude of CEO SERP benefits are indeed driven by CEO's power over the board. Second, I investigate consequences of CEO SERPs: the impact on earnings management practices when the anticipated tenure of the CEO is shorter than the firm's optimal investment horizon (i.e., the horizon problem), and the association with CEO's risk preferences. In general, the results confirm the association between CEO SERP benefits and many of the proxies for CEO power. I also find that firm's discretionary accruals--a proxy for earnings management--are positively associated with the horizon problem when CEO SERP benefits are contingent on firm's accounting earnings. The results also indicate that the structure of CEO's SERP has a significant association with CEO's risk-tolerance. Finally, the study provides additional evidence that ignoring SERP benefits significantly underestimates the magnitude of CEO compensation and distorts comparisons among CEO compensation packages

Year: 2007
OAI identifier: oai:

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