Companies Still Not Aligning CEO Pay with Results

According to an article in Monday’s Wall Street Journal, a new report from MSCI found that the “best-paid CEOs tend to run some of the worst-performing companies and vice versa.”

This, of course, raises the question of the effectiveness of the movement over the past 30 years to compensate CEOs with equity pay such as stock options and restricted stock.  It has been thought that such CEO compensation properly aligns their incentives with those of their companies’ shareholders. 

However, the study provides contrary evidence.  In fact, some would argue that the recent rise of stock repurchases has been designed by executives to temporarily boost stock prices and line their own pockets.

Align Incentives with Desired Outcomes

Regardless, shareholders and boards, especially, need to take a long, hard look at the incentives they are trying to create for their executives and determine if, and how, they are being gamed.  While establishing the right incentives for any corporate behavior can be difficult, this study plainly shows that equity incentives in CEO pay just aren’t working.

When setting up an incentive award system in any organization, it is critical to consider both if and how the system can be gamed as well as whether you may be potentially rewarding unintended behaviors rather than desired outcomes.