Making CEO pay a long-term investment

05/29/2009 | Knowledge@Wharton

CEO pay ought to be based on long-term performance rather than quarterly earnings, argues Wharton School finance professor Alex Edmans. By tying pay to long-term performance, Edmans notes, companies eliminate the incentive for a chief executive to try to pump up quarterly earnings in an unsustainable fashion just to score a bonus. Edmans suggests paying chief executives with a set ratio of cash and stock held in a long-term escrow account to make sure they keep "enough skin in the game."

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