How to incentivize CEOs to boost payouts? The role of inside debt

Abstract

This paper examines the role of inside debt in shaping payout decisions in corporations. We show that higher CEO ownership of debt-like components of managerial compensation known as inside debt is associated with an increased likelihood and level of share repurchases, as well it motivates CEOs to choose share repurchases as a primary channel for payout policies. Furthermore, boards utilize different components of inside debt to provide different incentives in terms of payout decisions: deferred compensation incentivizes repurchases, while pension benefits encourage cash dividends. We argue that several special arrangements included in deferred compensation move this type of compensation closer to equity-based compensation, while most effects expected from inside debt seem to come from pension benefits.