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CEOs with Severance Packages Underperform by Up to 4%

An assistant professor at Tulane’s Freeman School of Business has found that a company’s stock can suffer by as much …

An assistant professor at Tulane’s Freeman School of Business has found that a company’s stock can suffer by as much as 4 percent in the three years after it implements a CEO severance agreement, according to The Wall Street Journal.

After putting a severance agreement in place, on average, companies underperformed the markets by 1.6 percent.  And companies whose agreement was cash-only underperformed the markets by 4 percent.

56 percent of S&P 500 companies offer severance packages.

CEOs who had the security of a severance package were more likely to focus heavily on R&D spending, and thus had a higher potential for failed projects. Without penalties, CEOs take risks that they might otherwise take.

Should CEOs be given these packages as an incentive to be more forward-looking and possibly innovative (and slightly underperform for a few years), or should CEOs be driven purely by current market returns?

Read: CEO Safety Net Invites Risk-Taking, Study Says

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