The Advisors' Blog

– Liz Dunshee

This blog summarizes recent research that examines the link between executive equity pay & “myopic management” – cutting marketing spending to artificially inflate earnings. Interestingly, the researchers didn’t find that CEO equity would lead to this practice. But Chief Marketing Officers (“CMOs”)? That’s a horse of another color. Here’s an excerpt:

In our empirical analyses we find that the mere presence of a CMO in the firm has no effect on either the incidence or the severity of myopic management across all three proxies for marketing spending. We also find that CEO equity incentives are largely unrelated to the incidence and severity of myopic marketing management. CMO equity compensation, on the other hand, is highly predictive of the incidence and severity of myopic marketing management. Contrary to the belief that the presence of a CMO in the organization can help maintain customer focus and support for marketing departments, we find that CMOs not only fail to prevent myopia, but further exacerbate the problem as the market-based (i.e. equity) portion of their personal compensation increases.

Further, consistent with the CMO’s personal enrichment motivation, we also find that CMOs take advantage of artificially inflated stock valuation by exercising more stock options and selling more of their personal equity holdings in the years when myopic marketing management occurs. This observation is robust to many alternative explanations such as firm-specific or management-team-specific reasons to trade equity.