The shielding of CEO cash compensation from post‐acquisition earnings' charges

Abstract

Purpose

This study aims to examine whether CEO compensation is shielded from the negative effects of restructuring charges and asset impairments following the acquisition of the controlling interest in the stock of another corporation.

Design/methodology/approach

Regression tests using CEO cash compensation as the dependent variable, and restructuring charges, goodwill impairments, and other asset impairments associated with a target firm as independent test and control variables.

Findings

The results indicate that CEO cash compensation is increased when an acquiring firm with respect to the target firm records restructuring charges. Goodwill impairments have no effect on CEO cash compensation.

Research limitations/implications

This study is limited to the extent that it only considers CEO cash compensation. A future area of research is to examine the association of total CEO compensation and post‐acquisition earnings” charges. Shareholders encourage CEOs to proceed with synergistic restructuring following a merger/acquisition by increasing their compensation.

Originality/value

This study contributes to the literature by concluding that compensation committees consider the contextual nature of earnings” charges and the CEO's direct responsibility for the transaction in the determination of CEO compensation.

Citation

Dorata, N.T. (2008), "The shielding of CEO cash compensation from post‐acquisition earnings' charges", Managerial Finance, Vol. 34 No. 5, pp. 288-303. https://doi.org/10.1108/03074350810866171