Reforming Executive Compensation: Simplicity, Transparency and
Committing to the Long-term
by
SANJAI BHAGAT * and ROBERTA ROMANO**
This Article advances an executive compensation reform proposal that is specifically
addressed to firms receiving government financial assistance and thought to pose a systemic
risk, although we think that all firms should consider its adoption. Executive compensation
reform should lead to policies that are simple, transparent, and focused on creating and
sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive
compensation plans should consist only of restricted stock and restricted stock options,
restricted in the sense that the shares cannot be sold nor the options exercised for a period of at
least two to four years after an individual resignation or last day in office. We would permit a
minor amount to be paid out to executives currently to address tax, liquidity, and premature
turnover concerns that the proposal could induce. We believe that this approach will provide
superior incentives for executives(and traders whose actions can substantially impact an
organization) to manage firms in investors longer-term interest, and diminish their incentive to
make public statements, manage earnings, or accept undue levels of risk, for the sake of shortterm
price appreciation. By reducing management incentive to take on unwarranted risk, our
proposal would therefore also decrease the probability that public resources will be dissipated
in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”