Big payouts for CEOS 'have no effect on whether businesses thrives'
Researchers found that bonuses and stock options actually have no effect, or minimal effect on how businesses actually do.
The eye-wateringly vast bonuses and stock options handed to top CEOs are motivated by the effect bosses are thought to have on a business’s bottom line.
But do these bonuses actually work? A new systematic review of CEO incentives focused on whether the vast bonuses handed to bosses actually have a measurable effect on the performance of the business as a whole - and found that bonuses and stock options actually have no effect, or minimal effect on how businesses actually do.
The researchers, from Carnegie Mellon University and Seoul National University, say that companies may want to seek new ways to boost performance.
Lead author Denise Rousseau, professor of organisational behavior and public policy at Carnegie Mellon's Heinz College said, "No systematic review has been done on the effects of financial incentives to CEOs, so firm compensation committees and policymakers have had no evidence to inform their decisions.”
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How did the researchers measure this?
Researchers reviewed 20 empirical studies on the effects of financial incentives on thousands of publicly traded firms' performance that were conducted from 1980 to 2023. This was during the era of deregulation and increased competition under the Reagan Administration in the United States and the Thatcher government in the United Kingdom.
They also examined three studies on the relation between CEO financial incentives and subsequent financial restatements of business outcomes. The companies in the research were located worldwide, with most in the United States, Europe, and Australia.
The financial incentives examined included bonuses for achieving business targets and stock options on favourable terms, increasingly a major source of CEO wealth.
What did they find?
Researchers sought to determine the effects of CEO financial incentives on three business outcomes: firm accounting, market performance, and financial restatement (revising previous financial statements to correct errors or inaccuracies).
Bonuses for CEOs had a small predictive effect on the following year's return on assets but did not affect other performance metrics, such as next year's market-to-book value or stock return. Stock options for CEOs had no effect on the following year's return on assets or on any market-related metrics. Neither bonuses nor stock options predicted firms' market-related metrics. Moreover, CEO financial incentives had no effect on subsequent financial restatements.
What can companies learn from this?
Byeong Jo Kim, associate professor of public management at Seoul National University's School of Public Administration, who coauthored the analysis said, "Despite the widespread use of financial incentives for CEOs as drivers of firms' performance, our findings suggest it may be problematic to justify current CEO compensation arrangements based on anticipated market results.”
"We recommend caution regarding current practices and more consideration of alternative arrangements to enhance firms' performance."
