Executives' short-term and long-term incentives - a distributional analysis

Michael Haylock

No 131, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: Executives are often paid for short-term changes in shareholder wealth, but rational shareholders want executives to maximize long-term shareholder wealth. Incentives for short-term and long-term oriented behavior may depend on an executive's level of pay in the distribution, holding other factors constant. This paper tests for distributional heterogeneity of short-term and long-term incentives in a 12 year cross-country panel of executives. I use the band-pass filter to separate short-term and long-term shareholder wealth changes (Christiano and Fitzgerald, 2003), and estimate of the shareholder wealth-pay relation using method of moments-quantile regression, developed by Machado and Santos Silva (2019), which accounts for time-constant unobserved heterogeneity of executive-firm pairs across the distribution. When using yearly total compensation to measure pay, executives in the upper tail of the conditional compensation distribution have longer-term oriented incentives. In contrast, when accumulated executive wealth is used to measure pay, executives in the upper tail of the wealth distribution have shorter-term oriented incentives. Since executive wealth encompasses changes to executive utility after pay is granted through accumulated equity-linked pay, it is the preferred measure for evaluating equity-linked pay. Results thus suggest that equity-linked pay should have a longer vesting period for executives in the upper tail than in the lower tail. I find evidence that executives in the upper-tail are evaluated relatively to the industry's short-run and long-run performance.

Keywords: Executive Compensation; Method of Moments-Quantile Regression; Short-Term Performance; Long-Term Performance; Distribution; Benchmarking (search for similar items in EconPapers)
JEL-codes: J31 M12 M52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-hrm, nep-lma and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/215410/1/1690924969.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:131

DOI: 10.15496/publikation-39718

Access Statistics for this paper

More papers in University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().