Executive reward and corporate investment

There is a tendency for CEOs to cut good investment projects to boost short-term company earnings and stock prices in the run up to their shares vesting, according to a new study looking at the impact of vesting. The authors of the study – Vivian Fang, Katharina Lewellen and Alex Edmans – argue that, too often, proposals for reforming executive pay focus on the level of pay, despite the fact that the average CEO’s pay in the US is about 0.05% of the average company’s value.

They argue that the horizon of pay (vesting period) is more important as it affects the CEO’s motivation to invest, with potentially huge implications for the company’s long-term success and the value it creates for other stakeholders. Cutting executive pay in half generates more headlines than extending the vesting horizon from, for example, three to seven years, but the latter is likely to have more impact the research concludes.

Take a look at Alex Edmans’ blog for a summary of the research: http://alexedmans.com/ceos-cut-investment-to-sell-their-own-shares-at-high-prices/