The Hidden Nature of Executive Retirement Pay

Since the financial crisis, federal regulators have been searching for ways to rein in excessive risktaking in the financial sector. Many scholars and regulators have argued that executive retirement benefits can serve this risk-curbing function. Because top managers might not receive their promised retirement payouts if their firm goes bankrupt, the theory goes, generous retirement benefits encourage them to manage their firms more carefully. This view—sometimes called the “inside debt” hypothesis—assumes that, through retirement benefits, managers continue to be exposed to the firm’s credit risk after they retire. But no previous work has tested that assumption empirically. In our new … Read more