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

11 Pages Posted: 4 Feb 2009 Last revised: 20 Nov 2009

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Roberta Romano

Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: February 1, 2009

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

Suggested Citation

Bhagat, Sanjai and Romano, Roberta, Reforming Executive Compensation: Focusing and Committing to the Long-Term (February 1, 2009). Yale Law & Economics Research Paper No. 374. Available at SSRN: https://ssrn.com/abstract=1336978

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Roberta Romano (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4965 (Phone)
203-432-4871 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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