Managerial compensation and the threat of takeover

A greater threat of takeover has two opposing effects on managerial compensation. The competition effect in the market for managers reduces compensation. The risk effect increases compensation by making managers' implicitly deferred compensation and firm-specific human capital less secure. Using a sample of about 450 large firms, we find that an increase 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 due to the risk effect. The net effect is an increase of $18,700-43,700. (C) 1998 Elsevier Science S.A. All rights reserved.