Should CEO pay be linked to results?

Abstract

In many companies the compensation of top executives fluctuates without regard to the ups and downs of profits, return on equity, or earnings per share. This lack of correlation between pay and financial performances seems to be most noticeable in companies with one dominant business. (In companies pursuing a variety of unrelated businesses, the fluctuations in pay level tend to be greater, but they are tied more closely to changes in profit performance.) A company that lets top executive pay get out of phase with profitability may be asking for trouble, the authors believe. Not only may the practice be damaging to employee morale, but it also opens the door to criticism from union spokesmen,...