Pay does make a difference to long term returns – recent research on patterns of pay, ownership and shareholder returns

We have also reported on “short-termism” and the impact of institutional investor ownership and executive pay (see, for example HERE).

Prior research had shown that managers in publicly traded companies facing earnings pressure – the pressure to meet or beat stock analysts’ earnings forecasts – may behave in ways to improve short-term earnings. Some researchers have argued that these improvements may come from inter-temporal trade-offs that endanger future competitiveness and performance.

explore how important dimensions of corporate governance may intensify or mitigate how managers respond to the pressure generated by analysts’ forecasts. The dimensions include ownership structure and CEO incentives that affect the time horizons of shareholders and managers.

examine the effect of earnings pressure on competitive behavior under different corporate governance conditions. The results suggest that companies with long-term-oriented investors and long-term-aligned, unvested CEO incentives (restricted shares and exercisable stock options) are less sensitive to earnings pressure. In contrast, companies with more “transient” investors and CEOs with vested, immediately exercisable stock-based incentives are more responsive to earnings pressure.

The paper is titled “Earnings Pressure and Long-Term Corporate Governance: Can Long-Term-Oriented Investors and Managers Fend off Short-Term Analyst Earnings Pressures?” and can be sourced from BlackRock.