Executive Compensation and Performance Metrics

Medium Corporate Governance Executive Compensation

In corporate finance, effective governance practices often require alignment of executive compensation with long-term shareholder value. Recently, a company has faced scrutiny over its executive pay structure due to a significant discrepancy between pay and performance. The board of directors has proposed a new compensation plan that is tied more closely to metrics of performance such as return on equity (ROE) and total shareholder return (TSR).

Given this context, which of the following statements best describes a potential benefit of aligning executive compensation with these performance metrics?

It reduces the risk of management engaging in excessive risk-taking that may endanger the company.

It guarantees that executive compensation will remain competitive within the industry.

It ensures that executives are rewarded for short-term performance instead of long-term value creation.

Hint

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