LBS and Wharton Professor Alex Edmans put out a short, concise paper in the November 2014 edition of Governance entitled "Reforming CEO Pay". It's an insightful piece for governance researchers seeking a better understanding of structuring compensation for the C-Suite.
Edmans starts by acknowledging the importance of the level of CEO pay as a so-called "level 1" issue but goes on to identify two further dimensions. First, he names the sensitivity of pay to performance as a level 2 issue. Referencing Jensen and Murphy (1990), Edmans highlights the allocation of cash to equity (its allocation to short- and longer-term structures) can be an important consideration. At that same time, the author acknowledges banks with shareholder-aligned CEO compensation schemes did not always do well during the financial crisis.
Lastly, Edmans identifies the structure of CEO pay as a level 3 issue. His bottom line here is that lengthening vesting periods would be a welcome adjustment to improve shareholder and CEO alignment, while being more skeptical of the legality and practicality of clawbacks as a means to better structure compensation. You can find more of Professor Edmans's work on his blogsite "Access to Finance".
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