Public bailouts, executive compensation and retention: A structural analysis

• We estimate a structural model of CEO pay and retention during financial crises.
• We study a policy that caps CEO base pay when firms accept public bailouts.
• We quantify bailout acceptance decisions and the distortion in pay contracts.
• We simulate the policy effects on pay, retention, bailout decisions, and profit.

We study the effects of institutional constraints on incentive contracts by estimating a structural model of executive compensation and retention during financial crises. We use the model to analyze the effects of a cap on executive compensation for firms accepting public bailouts. Policy simulations include the following results. Estimated probabilities of bailout acceptance are low, suggesting that the costs to firms of accepting future constraints on executive pay are large. The policy reduces CEO retention rates, raises total compensation and firm profit, and distorts compensation contracts, yielding base pay (a slope) that is inefficiently low (high).