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The complicated formula — and incentives — behind CEO pay

Stan Alcorn Apr 24, 2015
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The complicated formula — and incentives — behind CEO pay

Stan Alcorn Apr 24, 2015
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Long ago, CEO pay came in the form of a CEO paycheck — and perhaps a bonus. 

Today, Aaron Boyd, director of governance research at executive compensation firm Equilar, says those cash payments are dwarfed by the roughly 65 percent of compensation for S&P 500 CEOs that comes in the form of stock.

Time-based Stock: Stocks that are awarded once you have worked at a company for a specific amount of time, such as 5 years. 

Performance Stock: Stocks that are awarded if the company meets certain metrics, like revenue goals or earnings per share.

The shift to stock was motivated in part by regulators’ and shareholders’ desire to make CEOs more accountable.

“The obvious thing to do for the CEO would be to just, you know, relax, definitely slack off on our dime,” says Lalitha Naveen, associate professor of finance at the Fox School of Business at Temple University.

“If you want to prevent that then you want the CEO to think like a shareholder,” Naveen says. 

Most of that stock compensation itself is now tied to some further performance metrics. But Kevin Murphy, professor of finance and business economics at the USC Marshall School of Business, thinks while the idea sounds good on paper, it’s only created more ways to game the compensation system.

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