Short-Term CEO Pay Isn’t Always a Mistake

Based on research by Brian Akins (Rice Business), Jonathan Bitting (Appalachian State), David De Angelis (University of Houston), and Maclean Gaulin (University of Utah)

Key takeaways:

• Short-term CEO pay is not always a sign of bad governance. When debt pressure rises, it can serve a practical purpose.
• After breaking loan terms, boards shorten how long CEOs have to deliver results and tie pay more closely to near-term financial health.
• Bond investors respond as if the company has become less risky, while stock investors show little concern.
   

Short-term CEO pay tends to draw criticism from investors, governance advocates and academics alike. 

The thinking goes: If executives are encouraged to prioritize near-term targets, they may sacrifice long-term value for immediate results. They might rush sales, for example, or fast-track products to meet their numbers. 

It’s a valid concern. But it assumes companies operate under stable conditions. 

A new study by Brian Akins of Rice Business and his co-authors, published in Contemporary Accounting Research, suggests the story is more complicated. When a company violates the terms of a loan — by taking on too much debt or missing promised earnings — the bank gains leverage and can demand changes, raise interest rates or even require early payment.

When that happens, the board turns its attention from long-term growth to stabilizing the company’s finances. That often means rethinking how the CEO is paid. “This is about more than cost-cutting,” Akins says. “It tells creditors the CEO is focused on keeping the company solvent.”

What happens when a company violates a loan covenant? 

To see how boards respond when debt covenants are breached, the researchers looked at 1,268 loan agreements from 186 companies from 2007 through 2018. They used a research design that compares firms that just violated a loan covenant with those that narrowly avoided doing so, allowing them to isolate what changes at the moment of the breach.

By focusing on firms just above and just below the threshold, the study isolates the effect of the violation itself. When firms violated those conditions, boards adjusted CEO pay in consistent ways. 

First, they shortened the timeline for earning performance-based compensation. On average, the vesting period shrank by roughly six months — a decline of about 26% to 30% compared with typical incentive structures. That change compresses accountability, making executives feel the consequences of their decisions sooner.

Boards also increased the weight placed on short-term accounting targets, such as annual earnings goals. The share of pay tied to those measures rose by 47% to 87%. In practical terms, that shift ties executive rewards more directly to financial metrics that affect whether the company can meet its debt obligations rather than to longer-term stock performance. 

Importantly, total pay did not decline. What changed was the timing and emphasis of those incentives.

“It’s easy to say long-term is always better,” Akins notes. “But when a company is facing pressure from its lenders, shifting the CEO’s focus to immediate results can protect both the company and its investors.”

Do markets see these pay changes as lower risk?

The researchers also looked at how markets reacted when companies disclosed these revised pay structures. If shorter incentive timelines reduce default risk, creditors should respond. 

The evidence suggests they did. 

Around the time firms disclosed new pay contracts after breaching loan terms, bond prices rose. At the same time, credit default swap (CDS) spreads — a market-based measure of default risk — declined. When CDS spreads fall, it signals that investors see a lower likelihood the company will miss its debt payments. 

The effect was strongest for short-term debt. One-year CDS spreads fell by roughly 4%, suggesting that creditors with the most immediate repayment concerns viewed the compensation changes as meaningful. 

Equity markets, by contrast, showed little reaction. Stock prices did not decline in response to shorter incentive horizons, suggesting shareholders did not see the shift as harmful to long-term value. 

Taken together, the market response suggests the change was not merely symbolic. Bond investors treated the change as a sign of lower repayment risk, while equity investors showed no sign of concern. 

Context matters for CEO pay

That response, however, was strongest when default risk was most immediate — when loans were nearing maturity or cash reserves were thin. In those cases, aligning the CEO’s incentives with creditors’ short time horizon appeared to matter most.

The study’s design strengthens that interpretation. By comparing firms that violated loan thresholds with those that narrowly avoided doing so, the researchers isolate the effect of the breach itself rather than broader financial distress. Within that setting, the pattern is consistent: shorter incentive timelines follow covenant violations, and credit markets respond. 

That does not mean shorter incentive horizons are always desirable. Under stable conditions, they can encourage the very myopia critics warn about. But when debt pressure rises and lenders gain leverage, shortening the horizon may serve a different purpose — stabilizing the firm and reducing repayment risk. 

The debate over CEO pay, in other words, may be less about long-term versus short-term, and more about context. “It’s easy to say long-term is always better,” Akins notes. “But when a company is facing pressure from its lenders, shifting the CEO’s focus to immediate results can protect both the company and its investors.”

Written by Seb Murray

Akins, et al (2025). “CEO Short-Term Incentives and the Agency Cost of Debt,” Contemporary Accounting Research.