After going through a divorce, there is an unusual change that happens: An executive’s pay often increases. Why? It could be linked to them curbing their ambitions.
According to some studies, the impact of divorce is significant for CEOs, and it has repercussions when it comes to their professional productivity. Many CEOs have significant losses in wealth, but this may help change their strategies on the job.
Looking at data, the author of the study found that an average CEO involved in the study increased their salary to an average of $150,000 with bonuses of around $260,000. These same divorced CEOs saw additional restricted and option stock grants worth well over $1.5 million added to their compensation. Overall, they earned around $2 million more just a year after divorcing, but how could that be?
Losing wealth spurs some CEOs into action
The simple answer is that losing wealth so suddenly makes some CEOs more risk averse. This can be helpful if the firm is working to consolidate itself financially. CEOs then have:
- Lower equity risk
- Fewer abnormal accruals
- Less volatile cash flow
- Fewer expenses
They may focus more on stock options at their firm and then consolidate the finances of the firm, helping their own firm’s stock grow. Since the stocks are usually where the CEO’s wealth will be following the divorce (especially if they lost liquid assets and real estate), then being safe and avoiding risks with those stocks can end up boosting the share price. Firms wanting CEOs to become more aggressive again may then offer increased compensation, so that they can diversify and be less risk averse in the future.
Essentially, firms that want their leaders to be less risk averse will take steps to get them more money, so that they have the flexibility to take risks. The firms may use better compensation packages to encourage them to take action instead of sitting patiently and playing it safe on the job. This is a unique situation that many boards plan for. If a CEO is divorcing, the likelihood is that they’ll see an increased paycheck within the next year to help keep them on track on the job.