And yet, the logic behind such mega awards – that they incentivize the CEOs who receive them to perform their best and prevent them from leaving for a competitor – fall apart on reflection. For one, these CEOs already own enormous stakes in the companies they lead. If they double the value of the company, they will double the value of their own stake. If additional billions are what it takes to get them to do their job, the companies don’t have to grant them a single extra share. It’s already baked in. Similarly, if these CEOs are so valuable that losing them would have devastating effects on a company’s value, then that would have the same effect on the net worth of the CEOs. In other words, CEOs who demand such packages are essentially like hostage-takers who put guns to their own head and threaten to pull the trigger.

 

Billion-Dollar Pay Packages Are Disasters-In-Waiting

The notion that outsized compensation awards incentivize CEOs to do their best falls apart on close examination.

By Gautam Mukunda

Gautam Mukunda writes about corporate management and innovation. He teaches leadership at the Yale School of Management and is the author of "Indispensable: When Leaders Really Matter."