CEO Incentives—It’s Not How Much You Pay, But How
Michael C. Jensen
Harvard Business School
Kevin J. Murphy
University of Rochester
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
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.
Keywords: incentives, compensation, salaries, bonuses, CEO, performance based pay, stock
© Michael C. Je