The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Washington Post article (also see this Cooley blog):

The big debates on CEO pay tend to focus on one thing: How high it is.

But in a recent essay in the Harvard Business Review, two London Business School professors say the real focus shouldn’t just be on the size of CEO pay, but on how it’s structured. Their argument: Research has shown, among other things, that performance incentives don’t really work for the complex nature of the jobs CEOs do, that high bonuses or stock grants can lead to unethical or even fraudulent behavior, and that lofty awards can crowd out the “intrinsic” motivation of wanting to do a good job for its own sake. Their radical solution: Don’t pay CEOs based on performance. Just give them a fixed salary instead.

We caught up with one of the authors, LBS professor Freek Vermeulen, who wrote the essay with his colleague Dan Cable, by phone while he was in Germany on a ski trip with his family. Our conversation with Vermeulen, which has been edited for length and clarity, is below.

So can you sum up your argument for those who haven’t seen the piece?

For most CEOs — and actually most top senior executives — their pay depends to a very large extent on some measure of performance. And I mean a very large extent in comparison to the rest of us. Most of us get a fixed salary and maybe a Christmas bonus. But for CEOs, it’s actually nothing unusual for 60, 70 or 80 percent of their remuneration to be dependent on performance. But we have quite a bit of research on the effects of that performance-based pay, and it isn’t very pretty. We know from research that it doesn’t have a very positive effect.

Before you get into the research, what’s the core of what you’re saying?

We know from this research that [performance-based pay] isn’t that effective. Others have been saying we need to change the measures of performance. But based on what we know from research, we say no. Actually, what you should do is something radically different. What you should do is not pay them for performance at all, but give them a fixed salary.