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The Unfulfilled Promise of Executive Compensation: A Critical Analysis

Fabian Mitchell

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Published in Pay Without Performance: The Unfulfilled Promise Of Executive Compensation

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Executive compensation has come under increasing scrutiny in recent years due to its perceived misalignment with corporate performance. Despite receiving substantial pay packages, executives at many companies have failed to deliver meaningful returns to shareholders and employees. In this article, we will explore the shortcomings of current executive compensation practices and examine alternative models that prioritize stakeholder value creation.

Pay without Performance: The Unfulfilled Promise of Executive Compensation

by Sorin Dumitrascu

4.1 out of 5

Language	:	English
File size	:	2198 KB
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Print length	:	304 pages

The Problem with Executive Compensation

The current system of executive compensation is based on the assumption that aligning executive pay with shareholder value will motivate executives to make decisions that benefit the company and its investors. However, research has shown that this assumption is often flawed. In fact, a study by the Economic Policy Institute found that "there is no consistent relationship between CEO pay and company performance."

There are a number of reasons why executive compensation may not be aligned with shareholder value. First, executives are often given incentives to focus on short-term results, such as quarterly earnings, rather than long-term value creation. Second, executive compensation is often determined by a board of directors who are themselves incentivized to keep executive pay high. Third, executives may have little personal financial stake in the long-term success of the company.

The Consequences of Misaligned Executive Compensation

The misalignment of executive compensation with shareholder value has a number of negative consequences. First, it can lead to excessive risk-taking, as executives may be tempted to make short-term decisions that boost their own pay, even if those decisions are not in the best interests of the company. Second, it can discourage investment in long-term value creation, as executives may be less likely to make investments that will not yield immediate results. Third, it can lead to a lack of trust between shareholders and executives, as shareholders may feel that executives are not working in their best interests.

Alternative Models of Executive Compensation

There are a number of alternative models of executive compensation that could be used to address the shortcomings of the current system. One model is to base executive pay on a combination of financial and non-financial metrics. This approach would ensure that executives are rewarded for not only delivering financial results, but also for creating long-term value for the company and its stakeholders.

Another model is to give employees a greater say in determining executive compensation. This approach would help to ensure that executives are held accountable to all stakeholders, not just shareholders. For example, employees could be given the power to vote on executive pay packages or to elect representatives to the board of directors who would be responsible for setting executive compensation.

A third model is to link executive compensation to the company's social and environmental performance. This approach would encourage executives to make decisions that not only benefit shareholders, but also benefit the community and the environment.

The current system of executive compensation is not working. It is misaligned with shareholder value, encourages excessive risk-taking, discourages investment in long-term value creation, and leads to a lack of trust between shareholders and executives. There are a number of alternative models of executive compensation that could be used to address the shortcomings of the current system. These models would help to ensure that executives are rewarded for delivering long-term value to all stakeholders, not just shareholders.

Pay without Performance: The Unfulfilled Promise of Executive Compensation

by Sorin Dumitrascu

4.1 out of 5