This week, The Wall Street Journal offers its solution for how to compensate America’s top executives at public companies. Since executive compensation packages have taken some real (and warranted) heat, the Journal suggests that it’s more important to focus on how CEOs are paid vs. how much CEOs are paid.
Wharton professor Alex Edmans gives the Journal these three ways to realign pay with performance:
- Pay CEOs in Debt: basing pay in debt and stock could discourage risk taking and make sure the CEO’s interests are aligned with its creditors and shareholders
- Make CEOs Wait to Cash In: extending the vesting period until after the CEO leaves drives incentive to focus on the long-term success of the company and not short-term gains
- Be Flexible/Change to Fit the Times: be open to changing the incentive structure if there are serious economic changes (reduce cash and increase stock to keep CEO incentive alive)