CEO INCENTIVE ALIGNMENT: INTENSITY AND TIME HORIZON: A COMMENT ON HUANG & HUANG

Abstract

The aim of this commentary is to discuss the findings of Ying Huang and Minjie Huang (2022) in “CEO Incentive Alignment: Intensity and Time Horizon.” Drawing on agency theory, the authors argue that incentives can lead to unintended negative consequences mainly due to goal incongruence and information asymmetry while on the contrary, incentive intensity strengths the alignment between CEO´s and firm performance. In order to provide a significantly more complete framework for understanding incentive alignment, the authors include CEO incentive time horizon, defined as the degree to which performance is evaluated and aligned with firm performance over a longer time period. Huang and Huang (2022) findings suggest (a) that firms with longer CEO-incentive time horizons exhibit significantly greater total shareholder returns, ROA growth, and reduced financial misconduct, (b) that longer investor time horizon strengthens the relationship between CEO incentive time horizon and financial misconduct, so as the relationship between CEO incentive time horizon and long-term performance, and (c) that higher information asymmetry strengthens the relationship between CEO incentive time horizon and financial misconduct, as well as the relationship between CEO incentive time horizon and long-term performance.