The Carrot versus the Stick: The Role of Incentive Compensation and Debt Obligations in the Success of LBOs

Authors

Sarah Peck, Marquette UniversityFollow

Document Type

Article

Language

eng

Format of Original

12 p.

Publication Date

6-2004

Publisher

University of New Haven College of Business

Source Publication

American Business Review

Source ISSN

0743-2348

Abstract

In a sample of 59 LBOs from 1984 to 1989, this study shows that, on average, the CEO is awarded more stock options as part of his/her post-leveraged buyout (LBO) compensation contract and that total cash compensation as a percentage of total assets is also higher after the LBO. However, the CEO is not more likely to change as a result of the LBO. Thus LBOs are used to restructure poorly designed incentives rather than to replace poorly performing CEOs. This study also finds that as the percentage of stock options awarded to the CEO increases, the likelihood of subsequent financial distress for the LBO decreases. Thus the restructured incentives contribute to the success of the LBO.

Comments

Published version. American Business Review, Vol. 22, No. 2 (June 2004): 1-12. Publisher link. © 2004 University of New Haven College of Business.

Recommended Citation

Peck, Sarah, "The Carrot versus the Stick: The Role of Incentive Compensation and Debt Obligations in the Success of LBOs" (2004). Finance Faculty Research and Publications. 82.
https://epublications.marquette.edu/fin_fac/82