Long‐Term Institutional Investors and Executive Compensation

Standard agency theory views would suggest that long‐term investors will use long‐term CEO compensation to align incentives and promote long‐term value maximization. An alternative view is that long‐term investors—who are more able to bear the fixed costs associated with monitoring—will monitor more heavily than short‐term investors, reducing the need for long‐term CEO incentives. Our results support this second view. Empirically, the equity (long‐term) proportion of CEO pay decreases when the institutional investor horizon increases. This is concentrated among easy‐to‐monitor firms, coincides with increased shareholder monitoring and less short‐term‐focused decision‐making, and there is no offsetting effect on equity vesting. Shorter‐term pay reduces the risk borne by the executive, reducing contracting costs (total compensation).