August 27, 2018
Activists As “Performance Pay” Substitutes?
– Liz Dunshee
According to research described in this MarketWatch article, CEOs average a pretty quick cut in base & incentive pay after an activist takes a stake in the company – to the tune of $350,000 less within one year. After the activist’s exit, pay goes back up. Here’s a hypothesis about why this happens:
“Since stock awards help align managerial interests with firm value, it is surprising to find a reduction in the level of stock awards in target firms after the activist has entered,” said one of the researchers. “We think this is because the activist joins the board and closely monitors the CEO. Therefore there is less need for performance pay, which is risky and quite expensive for the firm.”
“Once an activist exits the firm, there is a renewed need for performance pay to provide incentives to a CEO. In other words, the close scrutiny of firm management by activists is a substitute for performance-oriented stock incentives.”