The Implications of Complexity in CEO Pay Packages

Tying chief executive officer (CEO) pay to performance goals aims to solve a classic principal-agent problem, helping to ensure that the CEO acts in the best interest of shareholders. But can it be too much of a good thing – can compensation contracts be too complex?  Our research says yes.

Compensation contracts have numerous features, including different forms of compensation (e.g., salary, bonus, stock, and stock options), a variety of performance metrics, multiple periods for measuring performance, and different performance benchmarks (whether measured in relation to a specific pre-set target or the performance of a peer company). Compensation committees use … Read more