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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Quick takeaways
- The complexity of CEO compensation packages often prioritizes appeasing external influences over aligning with genuine shareholder interests, potentially harming firm value.
- The debate on CEO pay highlights the challenge of distinguishing between compensation earned through strategic actions versus luck amidst fluctuating market conditions.
Deep dives
Complexity in Executive Compensation Packages
Executive compensation packages have become increasingly complex over time as boards of directors seek to satisfy institutional investors and proxy advisors. This complexity often results from the desire to avoid controversies surrounding pay structures, leading to pay packages that contain a myriad of short and long-term incentives. Research indicates that a significant number of directors prioritize appeasing these external influences over maintaining alignment with shareholder interests, which can detrimentally impact firm value. Consequently, the intricate nature of these contracts can create confusion among shareholders and complicate the ability to assess true performance and contributions of CEOs.
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