MANAGERIAL COMPENSATION AND THE THREAT OF TAKEOVER

A greater threat of takeover has two opposing effects on managerial co mpensation. The competition effect in the market for managers reduces compensation. The risk effect increases compensation by making manager s' implicitly deferred compensation and firm-specific human capital le ss secure. Using a sample of about 450 large firms, we find that an in crease in the threat of takeover from the first to the third quartile reduces a typical CEO's salary and bonus by $22,800-211,600 due to the competition effect, but raises salary and bonus by $41,500-255,300 du e to the risk effect. Tile net effect is an increase of $18,700-43,700 . (C) 1998 Elsevier Science S.A. All rights reserved.