Long-Term Executive Compensation as a Remedy for Corporate Short-Termism
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Long-Term Executive Compensation as a Remedy for
Corporate Short-Termism
Caroline Flammer*
INTRODUCTION
It is often argued that corporations are too focused on the short term
(i.e., they are short-termist). For example, during the 2016 U.S.
presidential campaign, candidate Hillary Clinton urged companies to
escape the tyranny of short-termism.' Similarly, in the recent policy debate
in the United Kingdom on the need to reform corporate governance and
executive compensation, Bank of England's Chief Economist Andy
Haldane stated that [e]xecutive pay is a matter of profound and legitimate
public interest. Pay practices can encourage short-term behaviour in ways
which harm both firms and the economy.2
In this context, a recent article by Flammer and Bansal (FB)
published in the Strategic Management Journal argues that long-term
executive compensation can help mitigate short-termism.3 More precisely,
FB show that the (quasi-random) adoption of long-term executive
compensation leads to an increase in firm value, an increase in long-term
profits, and is conducive to long-term investments such as investments in
innovation and stakeholder relationships. In this Article, I briefly review
the core arguments and main results of FB.
I. A TIME-BASED AGENCY CONFLICT
In the economics literature, the relationship between shareholders
and managers is often conceptualized as a principal-agent relationship,
* Assistant Professor of Strategy and Innovation at Boston University Questrom School of Business.
This Article was prepared for the 9th Annual Berle Symposium, Investor Time Horizons, held at
Georgia State University College of Law on June 5-6, 2017.
1. Jennifer Epstein, Hillary Clinton Calls for Investors to Escape 'Tyranny'of Short Termism,'
BLOOMBERG (July 23, 2015), https://www.bloomberg.com/news/articles/2015-07-24/hillary-clinton-
calls-for-investors-to-escape-tyranny-of-short-termism-.
2. David Oakley & Jim Pickard, Theresa May Suffers Backlash over Flagship Business Reforms,
FIN. TIMES (Nov. 24, 2016), https://www.ft.com/content/l e804da2-b l9b- 1l e6-a37c-f4aO 1 ft b0fa l.
3. Caroline Flammer & Pratima Bansal, Does a Long-Term Orientation Create Value? Evidence
from a Regression Discontinuity, 38 STRATEGIC MGMT. J. 1827 (2017).
419](ViewImageLocal?handle=hein.journals/sealr41&div=19&collection=&method=preview&ext=.png&size=3)
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Long-Term Executive Compensation as a Remedy for Corporate Short-Termism
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