Is Business Broken? Are CEOS Paid Just For Luck?
Mar 6, 2025
Ana Albuquerque and Charlie Tharp, esteemed professors at BU Questrom School of Business, dive into the murky waters of CEO compensation. They question how much of a CEO's pay relies on luck versus merit and whether current pay structures are fair or excessively complex. The duo explores board dynamics, external market influences, and the risks associated with executive pay. They also discuss how peer evaluations impact compensation and the crucial role of transparency and alignment with broader societal goals.
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Why Pay Packages Get Complex
- Pay packages grow complex mainly to appease institutional investors and proxy advisors.
- Boards add numerous contractual provisions to avoid controversies, sacrificing perfect shareholder alignment.
Purposeful Complexity in Pay
- Boards add complexity to pay packages to address broader stakeholder concerns beyond shareholders.
- They include various metrics and time horizons to reflect strategic, talent, and communication goals.
Luck’s Role in CEO Compensation
- CEOs benefit from luck such as rising market tides or booms.
- This occurs because much of CEO pay is equity-based and tied to stock market movements.