Compensation packages including incentives tied to a company’s stock price can be powerful motivators for corporate leaders. But the authors’ study also showed that these motivations can produce some serious unintended consequences. Equity incentives can tempt CMOs to engage in short-sighted marketing management such as cutting R&D and advertising spending in an effort to inflate current earnings and enhance the company’s stock price. This myopic management boosts their personal earnings at the expense of their company’s long-term performance. Our findings highlight the pitfalls and limitations of overreliance on equity in managerial compensation packages.
Companies could continue to pay their C-level executives based on stock price performance but defer the payout to the future until the long-term consequences of their decisions become apparent. This would reduce the temptation to act on short-term impulses to boost equity compensation.