Money perks for CEOs are supposed to push them to lead their company to hit important business goals. Researchers from Carnegie Mellon University looked at all the studies on CEO incentives for the first time. They found that CEO bonuses had a small impact, but stock options didn’t affect how well firms did the next year in terms of return on assets.

“No systematic review has been done on the effects of financial incentives to CEOs, so firm compensation committees and policymakers have had no evidence to inform their decisions,” the researchers explain.

Financial perks

The researchers checked out 20 studies that looked at how financial perks affect the performance of thousands of publicly traded companies. These studies were done from 1980 to 2023, a time when there was less government regulation and more competition, especially under the Reagan Administration in the United States and the Thatcher government in the United Kingdom.

They also looked into three studies that explored the link between CEO financial perks and changes in how companies report their financial outcomes. The companies studied were from all over the world, with most in the United States, Europe, and Australia.

The financial perks they looked at included bonuses for hitting business goals and stock options given at favorable terms, which have become a big part of how CEOs make money. The researchers wanted to figure out how these financial perks affected three things: how companies report their finances, how well they do in the stock market, and if they had to change their financial reports later on.

Minimal impact

The findings showed that CEO bonuses had a small impact on how well a company did in terms of return on assets the next year. However, they didn’t have any effect on other measures, like how the company’s value compared to its book value or how its stock performed. Stock options for CEOs didn’t influence how well the company did the next year or any measures related to the stock market. Surprisingly, CEO financial perks didn’t have any impact on whether a company had to change its financial reports later on.

But, there are some limitations to the analysis. The researchers noted that some studies they looked at didn’t focus on how CEO perks predict outcomes but rather looked at it the other way around. Some studies didn’t pay much attention to how shareholders benefited, like in stock returns, and only a few looked at changes in financial reports as an outcome. Also, some studies relied on old data, so the researchers didn’t have much information on the actual terms of CEOs’ perk contracts.

“Despite the widespread use of financial incentives for CEOs as drivers of firms’ performance, our findings suggest it may be problematic to justify current CEO compensation arrangements based on anticipated market results,” the authors conclude.

“We recommend caution regarding current practices and more consideration of alternative arrangements to enhance firms’ performance.”