CEO bonuses could cost companies in the long term

http://www.eurekalert.org/pub_releases/2015-03/uom-cbc030915.php

Public Release: 9-Mar-2015
University of Melbourne

Capping and regulating CEO payments, including performance bonuses, could help make companies more profitable in the long term, new research has found.

According to modeling by Dr Peter Cebon at the University of Melbourne in Australia and Dr Benjamin Hermalin from the University of California, Berkeley, reliance on performance bonuses - which are often $7-10 AUD million per year for top Australian CEOs - can lead executives to pursue poor strategies, including being too focused on short term gains.

The model also showed that if bonuses are restricted, CEOs and boards will have an incentive to work together more closely. This closer relationship can enable the CEO to pursue strategies that are more profitable in the long run.

"We've seen CEO salaries skyrocket in the last 30 years. That is based on an assumption that these high incentives will create the most profitable environment for a company's growth," said Dr Cebon.

"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.

"Strategies driven by bonus payments can get in the way of long-term growth," said Dr Cebon.

•••••