CEO Incentives: It's Not How Much You Pay, But How

36 Pages Posted: 12 Apr 1999  

Michael C. Jensen

Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

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Abstract

Paying top executives better would eventually mean paying them more. The arrival of spring means yet another round in the national debate over executive compensation. Soon the business press will trumpet answers to the questions it asks every year: Who were the highest paid CEOs? How many executives made more than a million dollars? Who received the biggest raises? Political figures, union leaders, and consumer activists will issue now-familiar denunciations of executive salaries and urge that directors curb top-level pay in the interests of social equity and statesmanship. The critics have it wrong. There are serious problems with CEO compensation, but excessive pay is not the biggest issue. The relentless focus on how much CEOs are paid diverts public attention from the real problem--how CEOs are paid. In most publicly held companies, the compensation of top executives is virtually independent of performance. On average, corporate America pays its most important leaders like bureaucrats. Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets? We recently completed an in-depth statistical analysis of executive compensation. Our study incorporates data on thousands of CEOs spanning five decades. The base sample consists of information on salaries and bonuses for 2,505 CEOs in 1,400 publicly held companies from 1974 through 1988. We also collected data on stock options and stock ownership for CEOs of the 430 largest publicly held companies in 1988. In addition, we drew on compensation data for executives at more than 700 public companies for the period 1934 through 1938.

JEL Classification: G34, J44

Suggested Citation

Jensen, Michael C. and Murphy, Kevin J., CEO Incentives: It's Not How Much You Pay, But How. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Harvard Business Review, No. 3, May-June 1990. Available at SSRN: https://ssrn.com/abstract=146148 or http://dx.doi.org/10.2139/ssrn.146148

Michael C. Jensen (Contact Author)

Social Science Electronic Publishing (SSEP), Inc. ( email )

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Harvard Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
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Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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