Does pay lift CEO's performance?
Executive pay: Maybe it’s way out of line, maybe it’s perfectly justified. And maybe…
(Jun 11, 2010) —
Executive pay: Maybe it’s way out of line, maybe it’s perfectly justified. And maybe
it’s not even doing what it’s supposed to do.
Compensation for the top business leaders in Georgia and elsewhere is annual fodder
for long-standing arguments: Are mega-salaries linked to past performance? Do huge
incentives encourage chief executives to ever-greater brilliance? And how many zeroes
are too many?
The best-paid CEO in Georgia in 2009 had a guaranteed paycheck worth $1.2 million
and incentive compensation including bonuses and stock options worth nearly $13 million.
The amounts earned in that second category provoke critics who wonder whether executives
are rewarded less because of their performance than by fortuitous timing, that they
reap unearned windfalls when the stock market is soaring or the economy is surging.
While that critique has some truth, it is too simple, said Paul Lapides, director
of the Corporate Governance Center at Kennesaw State’s Coles College of Business.
He estimates that one-third of stock performance can be attributed to the executive
team, while roughly one-third is industry trend and the rest is the economy.
Despite that, he thinks top executives have the impact, expertise and drive to deserve
“There are a lot of problems with compensation,” Lapides said. “The system is not
perfect. But it is better than the others.”
Ironically, the virtues that make executives valuable could be cited to argue for
fewer incentives, Lapides said. “If you are a senior executive, the odds are you
don’t need a whole lot of motivation. You couldn’t get to be senior executive if
you weren’t driven.”
Big bonuses, in that sense, might almost be seen as an insult to executives, as if
money is all that matters to them, argues Dan Ariely, professor of behavioral economics
at Duke University’s Fuqua School of Business and author of the new book, “The Upside
of Irrationality.” And the impact of such large payouts may not be what the companies
imagine, he said.
Studies suggest that small incentives have little effect on performance, while modest
incentives generally get people to improve, Ariely said. But mega-bonuses are different.
Most top executives are already working hard, he said. “A very high payment can actually
backfire. If I pay you to be more thoughtful, creative, imaginative — what can you
do? The brain is not a muscle.”
It’s virtually impossible to tell whether incentives may move a CEO to do better
than he would have done anyway — just as it isn’t clear that he might do worse. But
that giant piñata of bonus cash dangling above a CEO’s head can be a distraction,
he said, and put the focus on the wrong thing.
Asked Ariely: “Do you want your surgeon during an operation thinking of his yacht
as an incentive?”
Link To Articlehttp://www.ajc.com/business/does-pay-lift-ceos-546880.html
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