CEO COMPENSATION IN FINANCIALLY DISTRESSED FIRMS - AN EMPIRICAL-ANALYSIS

This paper studies senior management compensation policy in 77 publicl y traded firms that filed for bankruptcy - privately restructured thei r debt during 1981 to 1987. Almost one-third of all CEOs are replaced, and those who keep their jobs often experience large salary and bonus reductions. Newly appointed CEOs with ties to previous management are typically paid 35% less than the CEOs they replace. In contrast, outs ide replacement CEOs are typically paid 36% more than their predecesso rs, and are often compensated with stock options. On average, CEO weal th is significantly related to shareholder wealth after firms renegoti ate their debt contracts. However, managers' compensation is sometimes explicitly tied to the value of creditors' claims.