Take Five: Balancing Compensation & Shareholder Interests

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Published in Boardmember December 24, 2009

An academic argues that perks and golden parachutes may be beneficial to shareholders, and that it is possible to design a compensation plan agreeable to executives, shareholders, and watchdog groups. How can that be? Meet Henrik Cronqvist, assistant professor of financial economics at the Robert Day School of Economics and Finance at Claremont McKenna College.
Corporate Board Member: You’ve suggested that annual cash bonuses should be based on measures that can’t be easily manipulated through accounting practices adopted by management. What types of measures are you referring to?
Henrik Cronqvist: Yes. The preferred measures are those that are all types such as EBITDA: earnings before interest, taxes, depreciation, and amortization. That could be one measure. It’s cash flow based, so in that sense it might be a better measure compared to earnings-based measures that may more easily be manipulated. No measure is likely to be perfect, however. It’s more a question of finding something that is more reasonable, therefore cash flow based measures seem to be favored over earnings based measures.

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