CEO Incentives Fail to Boost Company Performance

The topic of CEO compensation has taken center stage recently with news about top executives becoming incredibly wealthy even though they did little for their company’s stockholders. Over the years boards have supported incentive-heavy packages for CEOs by rationalizing that what’s good for the executive is good for the company. But compensation excesses, such as those at Enron and Tyco, have shown that what’s good for the CEO is not necessarily good for the shareholders.

A new study in the February-March issue of American Management Journal looks at the issue of executive compensation. The study, which was authored by four professors from Indiana University and Texas A&M, suggests that rewarding a CEO with stock and stock options does little to enhance a company’s performance. The study concluded that motivational compensation fails to improve a company’s financial success by any measurable means, including stock prices and return on assets.

The study’s lead author, Catherine Daily of Indiana University, said that even though motivational compensation doesn’t necessarily help a company’s performance, in most cases it doesn’t hurt it either, according to an article [1] in USA Today. Ms. Daily believes that many CEOs are highly motivated individuals who are driven to succeed, with or without stock options.