How Incentives for Long-Term Management Backfire

To hear long-term investors tell it, company executives have embraced short-term thinking like never before. Two obvious pieces of evidence: The use of earnings for share buybacks that cost more than they’re worth, and dividend increases that divert cash from long-term investment. Four hundred seventy-one companies in the S&P 500 bought back stock last year, and 372 companies expanded their dividends — actions undertaken in spite of the need to invest heavily to keep up with global market changes. Why would executives, charged with sustainable value creation, put so much focus on short-term maneuvers like distributing earnings instead of reinvesting them? Why isn’t more of that cash going into developing businesses for long-term gains — the big, outsized gains that come from big bets on the future? Among many good explanations is one that deserves more airtime: compensation design changes stemming from recent reforms that, ironically, were meant to benefit long-term shareholders.