An interview with London Business School professor Freek Vermeulen on his research into incentive compensation for CEOs. He and his co-author Dan Cable argue in the Harvard Business Review that high bonuses and stock grants provide perverse incentives that reward unethical or even fraudulent behavior.
For most CEOs — and actually most top senior executives — their pay depends to a very large extent on some measure of performance. And I mean a very large extent in comparison to the rest of us. Most of us get a fixed salary and maybe a Christmas bonus. But for CEOs, it’s actually nothing unusual for 60, 70 or 80 percent of their remuneration to be dependent on performance. But we have quite a bit of research on the effects of that performance-based pay, and it isn’t very pretty. We know from research that it doesn’t have a very positive effect.
We know from this research that [performance-based pay] isn’t that effective. Others have been saying we need to change the measures of performance. But based on what we know from research, we say no. Actually, what you should do is something radically different. What you should do is not pay them for performance at all, but give them a fixed salary.