The Role of Deferred Pay in Retaining Managerial Talent

Abstract

We examine the role of deferred vesting of stock and option grants in reducing executive turnover. To the extent an executive forfeits all unvested stock and option grants if she leaves the firm, deferred vesting will increase the cost (to the executive) of early exit. Using pay Duration proposed in Gopalan, et al. (2014) as a measure of the extent of deferred vesting, we find that CEOs and non-CEO executives with longer pay Duration are less likely to leave the firm voluntarily. Employing the vesting of a large prior-year stock/option grant as an instrument for Duration, we find the effect to be causal. Consistent with long pay Duration reflecting firms’ retention intentions, CEOs with longer pay Duration are also less likely to experience a forced turnover and the sensitivity of forced turnover to firm performance is significantly lower among firms that grant longer pay Duration. Overall, our study highlights a strong link between compensation design and turnover of top executives.