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The Optimal Duration of Executive Compensation: Theory and EvidenceRadhakrishnan GopalanWashington University in Saint Louis - John M. Olin Business School Todd T. MilbournWashington University in Saint Louis - John M. Olin Business School Fenghua SongPennsylvania State University - Smeal College of Business Anjan V. ThakorWashington University, Saint Louis - John M. Olin School of Business August 10, 2010 AFA 2012 Chicago Meetings Paper Abstract: While much is made of the ills of “short-termism” in executive compensation, in reality very little is known empirically about the extent of short-termism in CEO compensation. This paper develops a new measure of CEO pay duration that reflects the vesting periods of different components of compensation, thereby quantifying the extent to which compensation is short-term and the extent to which it is long-term. It also develops a theoretical model that generates three predictions for which we find strong empirical support using our measure of pay duration. First, optimal pay duration is decreasing in the extent of mispricing of the firm’s stock. Second, optimal pay duration is longer in firms with poorer corporate governance. Third, CEOs with shorter pay durations are more likely to engage in myopic investment behavior, and this relationship is stronger when the extent of stock mispricing is larger.
Number of Pages in PDF File: 43 Keywords: Executive Compensation, Vesting, Duration, Managerial Myopia, Corporate Governance JEL Classification: G30, J33 working papers seriesDate posted: August 10, 2010 ; Last revised: January 9, 2013Suggested CitationContact Information
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