Reforming Executive Compensation: Focusing and Committing to the Long-Term

Abstract

Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. We suggest that executive incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive’s resignation or last day in office. This will provide superior incentives for executives to manage corporations in investors’ longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation.

Keywords: executive compensation, restricted stock, financial institution regulation, emergency economic stabilization act

JEL Classification: G21, G28, G30, G38, K22