Long-Term Executive Compensation as a Remedy for Corporate Short-Termism

Abstract

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." 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. 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.