Boston University School of Law

The Challenge of Improving the Long-Term
Focus of Executive Pay

David I. Walker
Boston University School of Law

Boston University School of Law Working Paper 09-22

Abstract

A consensus is developing that executive compensation in the U.S. is inadequately linked to long-term company performance, resulting in reckless, short-term decision making. Congress, the Obama administration, and academic commentators have recently embraced dramatic restrictions on the form and holding period of senior executive pay, at least at some companies. A common view, apparently, is that while regulation of the amount of executive pay would do more harm than good, regulation of form and term is desirable.

This essay questions that view. It highlights the challenges of fruitfully regulating the term and form of pay arising from the complexity and diversity of executive pay arrangements, uncertainty as to the underlying reasons (and hence appropriate remedies) for short-termism, and the conflict between deterring reckless short-term behavior and encouraging sufficient risk-taking to maximize share value over the long term. This essay goes on to analyze and critique existing regulatory proposals, and, while not endorsing a regulatory solution, offer two ideas that policy makers should consider if faced with the job of crafting a regulatory response to short-termism: focusing regulation solely on the term of pay, leaving form to individual company discretion, and adopting a comprehensive disclosure-based response.

Cite as:

Walker, David I., "The Challenge of Improving the Long-Term Focus of Executive Pay ," Boston University School of Law Working Paper 09-22.


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David I. Walker Contact Information

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215
Email Address: diwalker@bu.edu
Phone: (617) 353-3174

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