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?