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Short-termism of executive compensation

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  • Pogach, Jonathan

Abstract

This paper presents an optimal contracting theory of short-term firm behavior. Contracts inducing short-sighted managerial behavior arise as shareholders’ response to conflicting intergenerational managerial incentives. High-return projects may last longer than the tenure of managers who implement them. Consequently, inducing managers to act in the long-term interests of firms requires the alignment of incentives across multiple managers. Such action comes at greater costs than providing incentives for a single manager and leads to contracts that favor short-term behavior. Long-term firm value maximization is further impeded when only the quality of accepted projects–but not those of declined projects–is public. In that case, shareholders find it costly to induce long-term project selection among managers who can earn all information rents from short-term projects but must sacrifice information rents from long-term projects to future managers.

Suggested Citation

  • Pogach, Jonathan, 2018. "Short-termism of executive compensation," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 150-170.
  • Handle: RePEc:eee:jeborg:v:148:y:2018:i:c:p:150-170
    DOI: 10.1016/j.jebo.2018.02.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Executive compensation; Short-termism; Sequential production;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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