In the wake of the recent financial crisis, executive-pay reformers are criticizing the policy of tying compensation to current firm performance. According to these reformers, this practice incentivized corporate managers to behave recklessly, which contributed to the crisis. Yet early last decade, in the wake of the Enron and MCI/WorldCom scandals, many of these same reformers argued that executive pay should be tied more closely to firm performance to disincentivize questionable practices that came to light in the scandals. Now, these reformers say pay should be tied to firm long-tem performance—that is, a large portion of a manager’s compensation should not be dispersed until long after the manager has left the firm. However, as detailed in this article, this proposal, like its predecessors, has serious flaws.
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