Research consistently shows that when CEOs of takeover target firms receive extra benefits during mergers, takeover premiums are lower.

LeBow College of Business professor Eliezer Fich says this is often interpreted as a conflict of interest: target CEOs sacrifice premiums for personal gain.

However, Fich argues, this research does not tell the whole story. He recently co-authored an article examining merger bonuses, which indicates that when target CEOs get bonuses, acquirers pay less but also get less in the form of low synergies — the gains that are created when two companies merge.

Fich says this evidence suggests that bonuses are used to revise compensation contracts when takeovers generate small synergy gains, helping firms circumvent conflicts of interest between target CEOs and their shareholders.

“More often, the bonuses are present in situations where the target firm was a hard-to-sell company that was not very appealing to potential acquirers,” Fich says.

An important consideration, Fich says, is that the merger often eliminates the target CEO’s job. An extra payment is sometimes necessary to get the target CEOs to consent to an acquisition.

Fich notes that, on average, the evidence related to merger bonuses is not consistent with payments being used to “bribe” target CEOs.

“Oftentimes, the bonus is a reward for achieving something that was hard to do,” Fich says.