S. David Young
Professor of Accounting and Control
Corporate Governance; Auditing, Risk Control and Performance ;
Most compensation packages do a poor job of linking pay to performance. Much of the blame lies with excessive reliance on competitive pay policies. When the primary focus of compensation is to ensure that managers are paid more or less in line with their peers, pay becomes decoupled from performance. And because the most important determinant of competitive pay is firm size, managers have strong incentives for profitless growth.To strengthen financial incentives, companies must rely less on competitive pay and more on increasing executive wealth leverage. The article shows why wealth leverage is important, what companies can do to increase it, and proposes other policies that can strengthen the ties between performance and pay.