When the CEO gets divorced, who else pays the price?
Strategy + Business, 2020-07-16
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.