Performance-based pay is a myth, study argues

Performance-based pay is a myth, study argues


November 30, 2014 12:30 pm • By David Nicklaus

Most companies will tell you they pay executives for performance, but a new study argues otherwise.

Boards usually don’t measure performance properly, and they do a poor job of matching it up with executives’ pay, the report’s authors say.

After studying 1,200 U.S. companies, they found that economic performance could explain only 12 percent of the variation in chief executives’ pay. Forty-four percent was explained by a firm’s size and the industry it was in.

•••••

what doesn’t get rewarded may not get done. The study suggests that pay incentives may make executives less willing to invest in the future: As a percentage of revenue, companies’ spending on research and capital projects has fallen 41 percent since 1998.

•••••

In fact, the authors classified one-fifth of companies as “value destroyers”: They earned less than their cost of capital. But if that measure doesn’t affect the pay plan, why should the CEO care?

•••••