Arranging Golden Goodbyes for Executive Exits: A Review and Agenda for Severance Pay

Abstract

While firms compensate executives in many ways, severance pay is perhaps the most controversial yet least understood form of executive compensation. In this study, we outline a review and agenda for severance pay owed if an executive is dismissed without cause from their role. Following changes to the disclosure of executive compensation in 2006, researchers have taken a renewed interest in studying executive severance pay. The current literature on this topic, however, has evolved along loosely connected research streams across multiple disciplines. This lack of integration presents a challenge for management scholars seeking to advance our knowledge of this important form of compensation. To address this issue, we provide an interdisciplinary review, incorporating recent studies that have taken advantage of the increased transparency of severance pay. Our review clarifies key differences between severance and other forms of executive pay and organizes prior studies along three main areas of research to draw conclusions about the current literature on this form of compensation. We also outline an agenda for future research, drawing upon several literatures that are key to management research—agency theory, managerial power theory, upper echelons theory, stakeholder theory, impression management theory, and the executive labor market. By integrating perspectives that, while less common in related fields, are central to management research, we provide unique insights for future research. Finally, we discuss key methodological issues, including data accuracy, measurement consistency, and analytical approaches, and how these can be addressed moving forward.