Compensation Goals and Firm Performance

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Posted by Radhakrishnan Gopalan, Washington University in St. Louis, on Sunday, June 11, 2017

Editor’s Note: Radhakrishnan Gopalan is Professor at the Olin School of Business at Washington University in St. Louis. This post is based on a recent article by Professor Gopalan; Benjamin Bennett, Visiting Assistant Professor at the Fisher College of Business at the Ohio State University; Carr Bettis, Executive Chairman of AudioEye, Inc.; and Todd Milbourn, Vice Dean and Hubert C. & Dorothy R. Moog Professor of Finance at the Olin School of Business at Washington University in St. Louis. Related research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

In the article Compensation Goals and Firm Performance which is forthcoming in the Journal of Financial Economics, we study the growing use of specific performance goals in top executive compensation packages. A recent survey by the consulting firm Hay Group found that more than half of the CEOs in their study have compensation tied to explicit goals, up from around 35% just four years earlier. Prominent shareholders like Warren Buffet agree with the need for such targets, stating: “Lacking such [goals], managements are tempted to shoot the arrows of performance and then paint the bull’s-eye around wherever it lands.”

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June 11, 2017 at 07:23PM

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