CEO pay cuts and forced turnover: Their causes and consequences

► We study large discrete decreases in CEO pay and compare them to CEO forced turnover. ► The determinants are similar, as are the performance improvements after the action. ► After either a pay cut or forced turnover, CEOs reduce investment and leverage, and improve performance. ► These large compensation cuts provides ex ante incentives for CEOs to exert effort to avoid poor performance. ► Large pay cuts are used as a substitute for forced turnover, helping to explain why forced turnover is rare.