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Sustainable Corporations in Non-Financial Sectors Through Optimal Design of Executive Pay
Published online by Cambridge University Press: 06 March 2019
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It is commonplace in current legal scholarship that pay packages for executives that were not tied to the impact of these executives' policies on shareholder wealth maximization often caused harm to shareholder interests and their companies, especially in the long term. The no-pay-without-performance postulate is as old as the first global economic crisis of the 20th century – the deep depression. Since then, this postulate has been repeated and substantiated innumerous times by the majority of experts in corporate law and business economics, but without real success. There are, however, commentators who deny the existence of a link between skewed incentive pay, excessive risk-taking, and financial losses. They instead insist on the superiority of the traditional director-centric model of corporate governance, which would allegedly preserve the balance that has generally worked well between the limited role and limited liability of shareholders and the active role, fiduciary duties, and potential liability of managers, which allegedly renders additional executive pay regulation unnecessary.
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References
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85 It should be explained in detail how a specific incentive plan design minimizes the pressure and influence of transient institutional shareholders who focus almost exclusively on short-term results and earnings; for various corporate governance weaknesses and firm under-performance issues associated with the negative role of transient institutional shareholder: See Lynne Dallas, supra note 5, at 304–06; Id. at 317–8, stressing the importance of the cooperation between management, internal controls and risk management for a firms long-term success.Google Scholar
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87 See Bebchuk, Lucian & Spamann, Holger, supra note 2, at 282.Google Scholar
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90 Cf. Bank, Steven, Devaluing Reform: The Derivatives Market and Executive Compensation, 7 DePaul Bus. L. J. 301, 309–11 (1995), examining traditional critiques of stock-based compensation, including the assumption that stock price is an adequate proxy for executive performance; Lynne Dallas, supra note 5, at 271, 298, attributing short-termism to the phenomenon of herding behavior; Toni Turner, Short-Term Trading In The New Stock Market, 99 (2005), explaining the differences between fundamental analysis and technical analysis, which is suitable for short-term earning strategies.Google Scholar
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93 Cf. Ira, Kay & Putten, Steve van, supra note 87, at 62.Google Scholar
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96 See e.g., Posner, Richard, Are American CEOs Overpaid, and, if so, What if Anything Should Be Done About It?, 58 Duke L.J. 1013, 1045–46 (2009), suggesting that restricted stock should constitute a minimum fraction of CEO pay.Google Scholar
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105 See Walker, David, supra note 40, at 653, noting that such compensation schemes as “stock” “compensation which takes the form of conventional time-vested restricted stock, performance-vested restricted stock, which is actually time and performance vested, and performance shares, which are contractual arrangements that are equivalent economically to performance-vested restricted stock” are available to every public company and have been employed to various degrees by the boards of public companies.Google Scholar
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107 See Bebchuk, Lucian & Fried, Jesse, supra note 102, at 1920, noting that it is essential for avoiding both spring-loading and stock-price manipulation around equity grants that at the time of vesting “the timing of equity grants should not be discretionary, and equity awards should be made only on certain prespecified dates. In addition, the terms and value of equity grants should not be linked to the grant-date stock price, which can easily be manipulated”.Google Scholar
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110 See Bebchuk, Lucian & Fried, Jesse, supra note 102, at 1920, noting that at the time of unwinding it is essential “to reduce the executives’ ability and incentive to time dispositions based on inside information, as well as reduce executives’ ability and incentive to manipulate the stock price around the time of disposition. Executives could be required to announce their intentions to unwind equity in advance. Firms could also use ‘hands-off’ arrangements under which an executive's vested equity incentives are automatically cashed out according to a schedule specified when the equity incentives are initially granted”.Google Scholar
111 See Bebchuk, Lucian & Freed, Jesse, supra note 102, at 1928–29.Google Scholar
112 Id. at 1933.Google Scholar
113 Cf. Carpenter, Mason, The Price of Change: The Role of CEO Compensation in Strategic Variation and Deviation from Industry Strategy Norms, 26 J. o. M. 1179, 1184, 1185, 1194, 1195 (2000), arguing that increases in long-term pay and long-term pay structure promotes strategic change, which fosters competitive advantage and secures the viability of a company.Google Scholar
114 Cf. Kowalik, Michael, Countercyclical Capital Regulation, 2 Fed. Res. Kan. City Econ. Rev. 63–64 (2011).Google Scholar
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