Paying chief executives big performance bonuses worth millions of dollars doesn't necessarily result in gains for shareholders, according to new research.
Modeling undertaken by Dr Peter Cebon from Melbourne University's Business School and Dr Benjamin Hermalin of the University of California's School of Business suggests that reliance on performance bonuses can result in top executives being too focused on short-term gains.
Dr Cebon said the salaries of chief executives had skyrocketed in the last 30 years in the belief that big incentives created the best environment in which to grow a company.
"In this research we've challenged that assumption and have found that relying on performance pay for CEOs doesn't necessarily lead to higher profits," Dr Cebon said on Tuesday.
"Strategies driven by bonus payments can get in the way of long-term growth."
Bonus payments based on results encouraged boards to hide behind measurable goals, rather than developing a deep understanding of what executives were doing.
This discouraged chief executives from pursuing strategies where the results were harder to measure, such as building organisational capabilities, or pursuing high-value, high-risk innovations.
"Those strategies are often much more valuable in the long run," Dr Cebon said.
The study found that many organisations could improve their performance and profits if payments to chief executives were regulated.
Regulating executive payments and bonuses would facilitate greater cooperation between the chief executive and the company board.
Share
