Capital Structure and Managerial Compensation

The Effects of Renumeration Seniority

R. Calcagno, L.D.R. Renneboog

Research output: Working paperDiscussion paperOther research output

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Abstract

We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts.Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice.We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives ("contract substitution" effect).If managerial compensation has priority over the debt claims, higher leverage produces lower powerincentive schemes (lower bonuses) and a higher base salary.With junior compensation, we expect more emphasis on pay-for-performance incentives.The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages33
Volume2004-120
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-120

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Managerial compensation
Seniority
Debt
Capital structure
Remuneration
Incentives
Salary
Incentive contracts
Bonus
Managers
Pay-for-performance
Bonuses
Bankruptcy
Substitution effect
Leverage

Keywords

  • seniority of claims
  • remuneration contracts
  • financial distress
  • insolvency
  • leverage

Cite this

Calcagno, R., & Renneboog, L. D. R. (2004). Capital Structure and Managerial Compensation: The Effects of Renumeration Seniority. (CentER Discussion Paper; Vol. 2004-120). Tilburg: Finance.
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Calcagno, R & Renneboog, LDR 2004 'Capital Structure and Managerial Compensation: The Effects of Renumeration Seniority' CentER Discussion Paper, vol. 2004-120, Finance, Tilburg.

Capital Structure and Managerial Compensation : The Effects of Renumeration Seniority. / Calcagno, R.; Renneboog, L.D.R.

Tilburg : Finance, 2004. (CentER Discussion Paper; Vol. 2004-120).

Research output: Working paperDiscussion paperOther research output

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