Course Notes: Continuous Business Learning

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When the CEO gets divorced, who else pays the price?

www.coursenot.es

When the CEO gets divorced, who else pays the price?

Strategy + Business, 2020-07-16

Max Kraynov
Jul 21, 2020
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When the CEO gets divorced, who else pays the price?

www.coursenot.es

Premise(s)

  • The current pandemic has put lots of strain on family relationships leading to divorce, and CEOs are not immune, either. [maybe even more so, as the pressure may be unbearable]

  • CEO divorce is far from just the CEO’s adventure, the company, shareholders and the Board are in this boat, too.

Observable Problems

Post-Divorce CEOs are More Risk Averse

  • Major events (vacations, protracted illness or death in the family) for CEOs have impact on their productivity and company performance.

  • But divorce, due to the sudden substantial loss in wealth, is unique.

  • CEOs know they will get poorer —> their wealth is linked to long-term incentives —> they become more risk averse to play it safe for themselves.

  • The stock options become a larger portion of their post-divorce portfolio —> need to derisk.

  • Less exploiting market fast-changing market opportunities.

Post-Divorce CEOs Earn … MORE

  • Compared to non-divorced CEOs, 1 year after the start of divorce CEOs get:

o   $150k increase in salary

o   $260k increase in bonus

o   $450k increase in restricted stock grants

o   $1.2m increase in stock options grants.

  • Higher cash/bonus compensation allows the CEO to diversify past the stock in the company and take MORE risks for the company. It’s a risk-taking incentive.

Closing Notes

  • There’s no proof the company performance declines after the CEO’s divorce.

  • But the Boards should recognize the case and incentivize the CEO to take more risks.

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When the CEO gets divorced, who else pays the price?

www.coursenot.es
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