CEO Compensation: How to Encourage Long Term Value Generation?

In an effort to make CEOs act like they have skin in the game - the past 30 years have brought a mindshift in shareholders’ thinking about CEO compensation: they moved from cash only compensation to incentive compensation with stock options and other equity incentives. It seemed a sensible choice at the time - to tie compensation to performance.

As a result, cash component has remained largely stable - at the level of the 1980s and the bulk of the rise in CEO compensation is actually attributable to incentive compensation. Still, this mindshift in executive compensation hasn’t really paid off.

So what would be an ideal executive compensation model that leverages both short term (high stock price and thus equity payments) and long term results (i.e the CEO acting as a business owner)?

In this short interview, watch Dirk Jenter - Associate Professor of Finance at London School of Economics and Political Science - debate what were the 3 big trends in executive compensation within the past 30 years and what is now needed to actually deliver shareholder value in a predictable and long-term manner.

Bio: Dirk Jenter is an Associate Professor of Finance at the London School of Economics and Political Science. Before joining the LSE, he was on the finance faculty of the Stanford Graduate School of Business and of the MIT Sloan School of Management. Professor Jenter's research focuses on the interaction of managers and firms with capital markets, on corporate governance, and on the evaluation and compensation of top executives. His research has been featured in the Financial Times, the Wall Street Journal, the Economist, the Financial Executive Magazine, Smart Money, and on CNN. He won the MIT Sloan Teacher of the Year Award in 2005, the MIT Sloan Award for Excellence in Teaching in 2007 and 2014, and the Stanford MBA Distinguished Teaching Award in 2012. He holds an M.Phil. degree in Economics from the University of Cambridge and M.A. and Ph.D. degrees in Business Economics from Harvard University.

Trivia: Professor Dirk Jenter is the brother of K.M.Trust & Partners’ Co-founder - Ms. Heike Kuenzel. She specializes in Executive Search  mainly for the financial industry. See her profile here.

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