As the Obama administration prepares to announce its plans for financial regulation reforms, several academics are focusing on the issue of executive compensation. In an op-ed in today's Wall Street Journal (subsq req'd.), Harvard's Lucian Bebchuk and Berkeley's Jesse Fried argue how to best tie compensation to long-term performance. They write:
...The period during which vested equity incentives may not be cashed out should be fixed. For example, when an executive's options or shares vest, one-fifth of them could become unblocked, and the executive would subsequently be free to cash them out, in each of the subsequent five years. Because the blocking period would be fixed, the executive's actions wouldn't be distorted by a desire to accelerate the cashing out of equity incentives. And as long as the executive is working for the firm and options and shares continue to vest, the executive would always have an incentive to care about the company's performance several years down the road.
Bebchuk and Fried argue against so-called "hold till retirement" requirements. They say forcing executives to wait until retirement to cash out only provides them with an incentive to leave their firms.
Bonus: Bebchuk's testimony before the House Financial Services Committee.
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