The Carrot versus The Stick: The Role of Incentive Compensation and Debt Obligations in the Success of LBOs

Peck, Sarah W.
June 2004
American Business Review;Jun2004, Vol. 22 Issue 2, p1
Academic Journal
This paper examines the role of incentive compensation and debt obligations in the success of leveraged buyouts (LBO). In a sample of 59 LBO from 1984 to 1989, it is shown that, on average, the CEO is awarded more stock options as part of his/her post-LBO compensation contract and that total cash compensation as a percentage of total assets is also higher after LBO. This paper also examines whether increased incentive compensation is adopted with or in lieu of other mechanisms available to improve managerial performance in the LBO. Increased share ownership, board control, and tighter debt terms are the other mechanisms typically used in LBO. The result of this study also shed some insight into the use of corporate governance mechanisms as substitutes and compliments.


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