Executive Compensation For The Long Run - Forbes.com

Executive Compensation For The Long Run - Forbes.com

Knowledge @Wharton
Executive Compensation For The Long Run
Knowledge@Wharton, 06.03.09, 12:45 PM EDT

Short-term incentives got us into trouble. Wharton professors say they have a better plan.

Bonus backlash aside, new Wharton research suggests a compensation structure based on long-term escrow accounts could be better--at least for a company's future--than the common practice of rewarding short-term changes in share price. Wharton finance professor Alex Edmans and a group of colleagues propose linking an executive's compensation to the performance of the firm over a longer time horizon. Their method also takes into account changing conditions within the firm.>

In a working paper titled "Dynamic Incentive Accounts," Edmans, along with Xavier Gabaix and Tomasz Sadzik of New York University and Yuliy Sannikov of Princeton University, outline a system that escrows compensation for a set period of years, stretching into the executive's retirement. >

The longer time frame is designed to prevent the executive from taking short-term actions that may enrich the manager at the expense of the firm's future profits. The plan also provides a rebalancing mechanism to maintain a constant percentage of compensation in cash and stock, so the executive always has sufficient equity in the firm to provide performance incentives--even if the stock price falls. >

Read full article: http://www.forbes.com/2009/06/03/executive-compensation-wharton-entrepreneurs-finance-wharton.html?partner=smallbusiness_newsletter

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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.