I study changes in CEO compensation and pay-performance relationship to examine how corporate spinoffs affect managerial incentive compensation and whether the changes
in management compensation can explain the value enhancement and operating performance improvements that occur following spinoffs. Analyzing a sample of 124 non-taxable spinoffs during 1990-1997, I find that changes in managerial compensation are a significant motive for spinoffs. Changes in managerial incentives alone are consistent with the post-spinoff changes in operating performance, while changes in business focus are not. Spinoffs that are not accompanied by enhanced pay-performance relations do not improve
operating performance even with increased business focus.
