How To Reform Executive Pay | Alex Edmans

Is the lengthening of a vesting horizon simply kicking the can down the road? All equity has to vest at some point, so the CEO will still act myopically in the vesting year, whenever it happens to be. Maybe so, but the main benefit will be on the behavior of CEOs today – such a lengthening would encourage them to take that four-year project. Moreover, a key implication of the above research is that boards of directors, and other stakeholders, should scrutinize CEOs in the months (or years) when they have significant equity vesting. Since most of the current focus is on Levels 1 and 2 of the CEO’s contract, most stakeholders don’t pay attention to vesting horizons. Lengthening the vesting horizon will improve the CEO’s incentives now, and monitoring the CEO in the vesting year will improve the CEO’s incentives then.

In short, paying executives according to the long term will ensure they have the long-term interests of the firm at heart.

via How To Reform Executive Pay | Alex Edmans.

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