It’s Not How Much You Pay But How – For 2024

Remember the spirited debates from the 1990s about executive pay? Well, it seems some themes in corporate governance are timeless than we thought they would be. 

In 1990, Michael C. Jensen and Kevin J. Murphy published an influential piece, "CEO Incentives—It’s Not How Much You Pay, But How," which argued compellingly that the real issue wasn’t the size of the paychecks handed to executives but the structure of these payments. Fast forward to today, and it's like we've barely moved the needle. 

The More Things Change… 

Back in the day, Jensen and Murphy took us on a statistical journey, showing us that despite the uproar over executive salaries, there was little correlation between pay and company performance. They pointed out that while everyone loves to get worked up about the figures, the systems used to determine those figures were—and still are—flawed. 

Here we are, decades later, still wrestling with the same beast. Executive compensation has continued to balloon, but the connection to corporate success remains as tenuous as a politician’s promise. The narrative has barely shifted; it's just been repackaged with newer, shinier graphics. 

The Illusion of Alignment 

One might hope that with all the technological advancements and shifts in corporate governance, we'd have seen a fundamental transformation in how we incentivize our corporate leaders. Yet, the basic premise remains: pay is not adequately aligned with performance. Sure, there are more metrics and analytics involved now, with dashboards and real-time data, but the underlying principles? Unchanged. 

The typical CEO still has little skin in the game. The stakes for them aren't about long-term value creation but about navigating through short-term metrics to maximize their take-home pay. It’s less about steering the ship through turbulent waters and more about ensuring their bonus hits the right numbers. 

Regulatory Echoes and Missed Opportunities 

Jensen and Murphy were advocates for a model where CEOs would own substantial stakes in their companies, aligning their interests directly with shareholders. Fast forward, and stock options are handed out like participation trophies, with most executives quick to cash in rather than invest long-term. 

Regulations have tiptoed around the edges of meaningful reform, with measures like Say on Pay giving shareholders a voice but hardly a veto. The result? A compliance dance where companies tick the boxes without embracing the spirit of these regulations. 

What's Next? The Path Forward 

If we're to break this cycle, we need to shift from cosmetic changes to foundational reforms. Compensation committees need to brave the storm of public opinion and regulatory pressure to devise pay structures truly tied to long-term value creation.  

This means more than just adjusting the dials on stock options or adding complexity to bonus criteria. It involves a cultural shift towards sustainable growth, where executive compensation reflects genuine milestones in innovation, market expansion, and financial health. 

Revisiting the Incentive Structure 

The future should see CEOs being more than just the highest earners but the most invested in their companies’ futures. Imagine a world where executive pay is as much about the health of the company five or ten years down the line as it is about this quarter's earnings. We're not just talking about higher pay for higher performance but smarter pay for smarter performance. 

In revisiting Jensen and Murphy’s insights, it's clear that the question isn’t just how much we pay our executives but how we can tie this pay to the metrics that truly matter. It’s time for a new chapter in executive compensation, one where pay structures are as innovative and forward-thinking as the business strategies we expect these leaders to implement. 

Conclusion

 As we look back on the discussions from the 1990s and confront today’s challenges, the continuity of these issues offers both a cautionary tale and a call to action. Let’s not wait another three decades to find we’re still having the same conversation. The time for real change is now, lest we find ourselves stuck in a loop, watching the same old drama on repeat. 

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