Spring 2019
FCLT Global: Can Executive Compensation Influence Long-Term Success?
What is the relationship between CEO variable performance compensation (as opposed to base salary) and long-term success? Two teams of BU Questrom MBA students worked on a semester long, behavioral economics-focused consulting project in partnership with FCLTGlobal (Focusing Capital on the Long Term).
They examined behavioral insights explaining CEO’s short-term decision making and proposed solutions specifically designed to tackle behavioral biases associated. Here are snippets of the teams takeaways.
Team Alpha:
- Major behavioral factor influencing CEO’s decision making
Social comparison and fairness: CEO’s satisfaction in compensation is tied to benchmarking against that of their peers. - Proposed solution
Developing a new set of long-term performance metrics, which should be measured relative to peers in a specific time period to address the behavioral issue of fairness.
Team Beta:
- Major behavioral factor influencing CEO’s decision making
Loss aversion: Investors react negatively to short-term losses, potentially at the expense of long-term gains. - Proposed solution
Award the variable compensation bonuses in advance, such that the CEO would owe the firm for any unmet target after a given period of time.
According to Matthew Leatherman, Research Director at FCLTGlobal: “When investors and companies are long-term focused, they are able to behave in a way that best serves the purpose of the organization. And when an organization serves its purpose in society to best of its ability, it has the best chance in doing well across many dimensions such as environmental impact, social impact, governance and stakeholders’ relations.”
To read the detailed reports from the MBA student teams, follow the links below:
FCLTGlobal is a not-for-profit organization founded by the Canada Pension Plan Investment Board, McKinsey & Company, BlackRock, The Dow Chemical Company, and Tata Son that develops tools and processes that help investment professionals put long-term strategies into action.
Alongside Ariel Babcock (Managing Director) and Matthew Leatherman (Research Director) both from FCLTGlobal, the teams were guided by Susilo Fellow Prof. Romain Cadario.