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Executive compensation has increased dramatically over the past 15 years, but so has forced CEO turnover. The authors argue that part of the development of CEO pay can be explained by the adverse consequences that forced turnover implies for a CEO. They find that for the CEOs of the largest US corporations, a one percentage point increase in exogenous turnover risk is associated with $40,000 to $90,000 more in terms of total compensation. The size of this risk premium is in line with estimates of the importance of career concerns and forfeiture risk. This relation survives a test of reverse causation and controlling for unobserved firm heterogeneity.
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