CEO incentives-its not how much you pay, but how

The arrival of spring means yet another round in the national debate over executive compensation. But the critics have it wrong. The relentless attention on how much CEOs are paid diverts public attention from the real problem-how CEOs are paid. The authors present an in-depth statistical analysis of executive compensation. The study incorporates data on thousands of CEOs spanning five decades. Their surprising conclusions are at odds with the prevailing wisdom on CEO pay: Despite the headlines, top executives are not receiving record salaries and bonuses. Cash compensation has increased over the past 15 years, but CEO pay levels are just now catching up to where they were 50 years ago. Annual changes in executive compensation do not reflect changes in corporate performance. For the median CEO in the 250 largest public companies, a $1,000 change in shareholder value corresponds to a change of just 6.7 cents in salary and bonus over a two-year period. With respect to pay for performance, CEO compensation is getting worse rather than better. CEO stock ownership-the best link between shareholder wealth and executive well-being-was ten times greater in the 1930s than in the 1980s. Compensation policy is one of the most important factors in an organization's success. Not only does it shape how top executives behave but it also helps determine what kind of executives an organization attracts. That's why it's so urgent that boards of directors reform their compensation practices and adopt systems that reward outstanding performance and penalize poor performance.