There is one problem with all forms of variable pay—whether short term or long term, based on cash or on equity. There is always a ﬁ nancial upside for executives (and sometimes that upside is quite high), but there is not an equivalent downside. To be sure, executives may not receive a bonus if they do not beat their targets in the company’s plan, or they may ﬁ nd that their options are worthless if the company’s stock tanks. But in neither case is their own wealth genuinely at risk, as it is for the typical investor. This asymmetry of risk between executives and investors reinforces a short-term focus and encourages imprudent risk-taking.
Authors: Frank Plaschke, Gerry Hansell, Lars-Uwe Luther, Mathias Schatt
Source: Boston Consulting Group (BCG)
Subject: Corporate Governance