When you create incentives, you always have to be careful to find out exactly what scenarios maximize the rewards of those incentives. These scenarios may be un

When you create incentives, you always have to be careful to find out exactly what scenarios maximize the rewards of those incentives. These scenarios may be unexpected (Freakonomics touches on this alot). Creating incentives that are short term or simply give rewards in the face of egregious errors is why CEO compensation today is a scam. Many CEOs don't expect to be at a company longer than a few years, so their horizon for increasing the stock price is short term, often hurting the company in the longer term. You can see this when companies have firesales to save a quarterly result, only to hurt the next few quarters. With the alternative being three mediocre quarters with no rewards, in some incentive system it's better to artificially pump up one quarter and tank the next two quarters. If stock options vested over a period of, say, 20 years, I wonder how the actions of CEOs would change? I'm not sure, but I think, on average, they would be vastly different than they are today. I'm reminded of an article about Costco, where the CEO (who is an unusual type of CEO) said that Wall Street was clamoring for him to raise his profit margins and reduce the pay of his employees. He thought that this strategy would definitely raise revenues in the short term and destroy the company in the long term, by opening up an opportunity for a competitor.