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Short-termism of executive compensation

Jonathan Pogach

Journal of Economic Behavior & Organization, 2018, vol. 148, issue C, 150-170

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.

Keywords: Executive compensation; Short-termism; Sequential production (search for similar items in EconPapers)
JEL-codes: D8 G3 J3 L2 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jeborg:v:148:y:2018:i:c:p:150-170