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Ebook Does “Long-Term Compensation” Make CEOs Think Long-Term? A Study of CEO Compensation in the Commercial Banking Industry


Submitted by wulan on Thu, 06/03/2010 - 08:43

Executive compensation never fails to make headlines in a time of crisis. Since 2007, in the wake of the mortgage market meltdown, pay packages in the financial industry have come under increased fire. President Obama called Wall Street bonuses “the height of irresponsibility” and described them as “shameful”. Missouri Senator Claire McCaskill introduced legislation to cap executive compensation at firms that accepted federal bailout money. When performance sinks, the public, employees, and shareholders want to see it reflected in the top spot’s paycheck.

Is this criticism justified, though? Most of the condemnation focuses on the dollar amount of CEO pay. However, as Jensen and Murphy point out, the amount of payment is not nearly as important as the method. Shareholders presumably want their managers to guide their firm to long-term health and success. The compensation mechanisms currently in place are intended to ensure just that. JPMorgan Chase, for example, describes the principles behind its executive compensation plan as “an acute focus on performance, alignment with shareholder interests, a sensitivity to the relevant market place and a long-term orientation” (emphasis added).

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