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E-MailJin Xu is Assistant Professor of Finance at Virginia Tech Pamplin College of Business; and Jun Yang is Associate Professor of Finance at Indiana University Kelley School of Business. This post is based on a recent article by Professors Xu and Yang. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.
Starting with Lewellen (1968), scholars have examined many facets of the executive compensation plan: salary, annual bonuses, stock and options, pensions, and, more recently, severance pay. A unique component that has largely been overlooked, however, is the signing bonus. Labeled by the media as “golden hellos”, the signing bonus is typically awarded to an executive who is identified by the board of directors as having special skills that are critical for the firm’s success. It is a one-time, upfront award granted when an executive assumes a new post and is arranged separately from the executive’s annual compensation plan.
In our article, Golden Hellos: Signing Bonuses for New Top Executives, recent published in the Journal of Financial Economics, We examine signing bonuses awarded to executives hired for or promoted to Named Executive Officer (NEO) positions at S&P 1500 companies during the period of 1992–2011. The signing bonus has become an important component for compensating top executives at large U.S. companies in recent years. In 2011, 12.0% of new Named Executive Officers (NEOs) at the S&P 1500 firms received a signing bonus. The average grant-date value of the signing bonus is $2.5 million for all NEOs and $7.1 million for CEOs over the period of 1992–2011. This value is similar to total annual compensation and is larger than the widely discussed severance pay.
In contrast to annual compensation, the signing bonus is awarded on or immediately after the executive’s starting date. Almost all (98.5%) executive signing bonuses include a cash payment that vests shortly, on average four months after signing. The average signing bonus award is comprised of 46% cash and 54% equity for CEOs, and 59% cash and 41% equity for other NEOs. The equity portion of the signing bonus typically vests over a period of three to five years.
Two contrasting views exist on executive signing bonuses. Some consider them a manifestation of managerial power and an indication of governance failure. Lucian Bebchuk stated, “Investors should be skeptical of golden hellos, which represent pay decoupled from performance and provide no retention incentives.” Others view signing bonuses as an incentive device and a commitment mechanism that the boards of directors use to attract, motivate, and retain executives with the skills critical for a firm’s success (e.g., Van Wesep, 2010).
We examine various rationales for the propensity and size of the signing bonus award, focusing on its role in mitigating executives’ concerns about termination risk. We further investigate the implications of the signing bonus award on firm performance and executive turnover. Lastly, we examine the relationships between the signing bonus and severance pay. We find that the signing bonus is more frequently awarded to executives with greater information asymmetry (i.e., executives hired from outside the firm or outside the industry, and to opaque firms) and higher innate risks (i.e., executives hired to firms that previously fired the CEO, firms with greater R&D, more volatile stock returns and lower stock returns and sales growth), and especially to younger executives (who have more to lose upon termination). Among external hires, executives who are connected to the board of directors (professionally or socially) are less likely to receive the signing bonus. Among internal hires, executives with longer tenure are less likely to receive the signing bonus. When termination concerns are strong, signing bonus awards are associated with better performance and retention outcomes. The signing bonus and severance pay are often awarded to the same executives.
Overall, we conclude that, even though the signing bonus is awarded before performance is observed, awarding the signing bonus mitigates an executive’s concerns about termination risk and motivates the executive to exert value enhancing effort. It helps attract talent, provide incentives, and improve retention.
The full article is available for download here.
