The Advisors' Blog

– John Jenkins

This blog from Cooley’s Cydney Posner highlights a call for companies to reconsider their growing reliance on long-term incentive pay in executive compensation programs. Here’s an excerpt:

 In this Bloomberg article, a compensation consultant argues that most current compensation plans are just “a hodgepodge of reactions to ‘accounting rules, tax law, shareholder requirements, and legal considerations.’” These plans, he believes, have “no empirically demonstrated validity.” Instead, based on behavioral economics, this compensation consultant contends that CEOs should be paid with more near-term incentives.

The Bloomberg article notes that investors like long-term incentive based pay – which is increasingly tied to stock price performance, but at least one compensation consultant says that this approach simply does not make sense:

Investors like this arrangement because it suggests that executives have the same goals they do. Yet it flies in the face of what little we know about behavior and pay. Consider a CEO whose board promises her a $5 million pot if company shares rise a certain amount over three years. Behavioral economists argue that the executive won’t weigh the true value of the award because of our tendency—demonstrated in dozens of academic studies—to prefer a dollar today to two dollars some time from now. In theory, this means the board could extract the same effort from the CEO with, say, $3 million doled out at closer intervals.