The persistent impact of M&A on post-acquisition CEO Compensation

Abstract

The paper examines the level of CEO compensation after firms complete acquisitions by using U.S data during 2006-2012. It extends the previous literature by looking at the level of CEO compensation one and two-year following an acquisition to understand the effect of acquisition in longer term. It turns out that the equity based compensation, not bonus and salary, increases significantly after an acquisition during 2006-2012. More importantly, I find that an acquisition has a positive substantial impact on the total CEO compensation and this effect persists to the first year after deal completion; however, it intensifies an agency problem as evidence shows that CEO power exerts more influence than firm performance in determining the level of post-acquisition compensation and its effect on the compensation remains even in the second year following an acquisition.  In addition, one major finding in this paper is that the non-equity incentive plan compensation, which has never been studied before, is commonly used to reward acquiring CEO bases on various determinants after an acquisition. Finally, after studying the impact of an acquisition on pay performance sensitivity, the result suggests that an acquisition strengthens the link between total compensation contract and positive return after an acquisition.