Managerial compensation and firm performance: Evidence from corporate spinoffs

Abstract

In this paper, we study changes in the incentive structure of the CEOs in both parent and spun-off companies, and the effect of managerial incentives on operating performance due to an improved agency relationship between shareholders and managers of both firms after the spinoff. We construct a unique dataset that covers corporate spinoffs between 1992 and 2004. We find a certain level of increase in pay-performance sensitivity of the CEOs of spun-off firms as compared to the CEOs of parent firms. We find that pay-performance sensitivities of both parent and spun-off firms’ CEOs are positively related to the operating performance improvement after the spinoff. Overall, our study provides evidence that improved managerial incentive is a source of gains in spinoffs.