CEO equity vesting favours short-term returns over long-term value

One of the winning papers, Equity Vesting and Investment, “finds that vesting equity induces CEOs to reduce investments in long-term projects and to take actions that increase short-term stock price. More broadly, it shows that that the structure of CEO compensation has a causal effect on real-world decisions,” IIRCi says in its announcement.

The other paper, The Long-Term Consequences of Short-Term Incentives, finds that an increase in vesting equity is associated with a greater frequency of stock repurchases and mergers and acquisitions announcements, both of which are associated with higher short-term returns and lower long-term returns.

“The two winning research papers use the vesting schedule for CEO compensation — when the CEO can sell stocks and options — to demonstrate that heavy vesting periods lead to actions that suggest that some CEOs are more concerned with short-term stock price movement than long-term value creation.” says Jon Lukomnik, executive director, IRRCi, in a statement. “These are the first papers to closely examine the structure of CEO equity vesting schedules and then correlate it to value-creating or value-destroying corporate activities.”

IRRCi also selected another research paper, Corporate Governance and The Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes, co-authored by Bryan Hong at the University of Western Ontario’s Ivey Business School, for an honourable mention.

This paper finds that the integration of corporate social responsibility criteria in executive compensation, “leads to an increase in long-term orientation; an increase in firm value; an increase in social and environmental performance; a reduction in emissions; and an increase in green innovations,” IRRCi says.