Mandatory Long-Term Compensation in the Banking System -- And Beyond?

Abstract:     
In the wake of the recent financial crisis, executive pay reformers are criticizing the policy of tying compensation to current firm performance. According to these reformers, this practice incentivized corporate managers to behave recklessly, which contributed to the crisis. Yet early last decade, in the wake of the Enron and MCI/WorldCom scandals, many of these same reformers argued that executive pay should be tied more closely to firm performance, to disincentivize questionable practices that came to light in the scandals. Now, these reformers say, pay should be tied to firm long-tem performance — that is, a large portion of a manager’s compensation should not be dispersed until long after the manager has left the firm. However, this proposal appears to suffer serious flaws, just as previous reform proposals did. This paper examines those flaws.

Number of Pages in PDF File: 7

Accepted Paper Series