Emilie R. Feldman, Management Department, The Wharton School
Strategic Management Journal, September 2015
Abstract: This article investigates how corporate spinoffs affect managerial compensation. These deals are found to improve the alignment of spinoff firm managers’ incentive compensation with stock market performance, especially among spinoff firm managers that used to be divisional managers of the spun-off subsidiary, and particularly when the spun-off subsidiary performs better than or is unrelated to its parent firm’s remaining businesses. By contrast, incentive alignment does not improve for the parent firm managers running the divesting companies. This finding appears to be driven by a significant post-spinoff increase in these managers’ incentive compensation, the magnitude of which is inversely related to governance quality in their firms. Together, these results elucidate how spinoffs influence managerial compensation in diversified firms and the companies they divest.