The False Promise of Risk-Reducing Incentive Pay: Evidence from Executive Pensions and Deferred Compensation

Abstract

In this working paper, we present empirical evidence on the determinants of firms' use of executive pensions and deferred compensation, using a large panel of 1300+ firms over 3 years. We find that measures of managerial power and directors' preference for avoiding risk predict the size of pensions, and find little support for the finance literature's claim that pensions are an efficient form of contracting for firms with large debts. We also offer several theoretical reasons to doubt that "inside debt" such as pensions could serve effectively to align managers' incentives with those of creditors.