Matt Brady is associate director of research, Matt Leatherman is director, and Victoria Tellez is senior research associate at FCLTGlobal. This post is based on an FCLTGlobal memorandum by Mr. Brady, Mr. Leatherman, Ms. Tellez, and Ariel Babcock. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).
Short-term incentives motivate short-term behavior. Corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives while avoiding common pitfalls. Similarly, investors can support long-term executive remuneration plans through their votes and engagement.
Financial incentives motivate behavior—indeed, financial incentives may work too well. Executive pay is focused on a short time horizon—with recent data pegging average duration of executive compensation plans for CEOs of MSCI All Country World Index (ACWI) constituents at 1.7 years. [1] This short-term focus can have far-reaching consequences, yet setting out to make remuneration longer-term is no simple task.