An Empirical Examination of Executive Signing Bonuses: An Incentive Mechanism*

S&P1500 firms awarded signing bonuses to a growing proportion of new top executives in recent years, with the payments averaging $2.5 million from 1992 through 2011. Examining hand-collected data on 2,301 signing bonuses during that period, we find empirical evidence corroborating the signaling and incentive roles of the payments. Our research is the first empirical study on executive signing bonuses and provides an integrated framework for understanding the pay setting practice at large US firms. We find that a firm is likely to grant a signing bonus to an executive who is a good match but uncertain about his future success at the firm. Signing bonuses are most often used by firms that are large but young, R&D intensive, and have volatile stock returns and dispersed analyst forecasts on earnings. Recipients of signing bonuses tend to be young, inexperienced, and relatively uninformed executives. An executive receives a larger signing bonus when the cost of relocation and the value of forfeited equity at the previous employer are higher. The executive receiving the signing bonus receives greater equity awards, total annual compensation, and severance pay although he has a lower equity portfolio delta. We show that the firm awarding the signing bonus subsequently outperforms peers and the executive who receives the signing bonus has longer tenure at the firm.