Vol: 2, Issue: 1 2012

Page: 116-123

Effects of the CEO's Turnover and Compensation on Performance Risk

Baljinder Kaur, Dr. Pinki

In this study, we explore how the uncertainty around a CEO's performance affects the board's capacity to assess the executive's potential. We postulate that idiosyncratic risk yields more information content in performance while systematic risk yields lower information content. We present strong empirical evidence that both the frequency of CEO turnover and the turnover-performance sensitivity increase with idiosyncratic risk and decrease with systematic risk. We further examine the connections between CEO termination risk and remuneration and find that for CEOs who are retained, both pay-performance sensitivity and overall pay levels fall as turnover rates rise.