“Right now, I think the increase in CEO pay is more stock market driven than profit driven,” said Radhakrishnan Gopalan, Olin associate professor in finance told NBC News in response to a new study from the Wall St. Journal on CEO compensation.
“The stock market is rising in anticipation of future growth in profits,” Gopalan said. “The stock awards, which are basically what’s driving the growth in CEO pay, are mostly a motivator for future performance.”
This kind of forward-looking optimism is typical of a stock-heavy incentive structure, but some warn this can be an imperfect way of measuring performance, since bull market gains aren’t matched proportionately with bear market losses.
Unfortunately, they never retrench,” Gopalan said. “That link is weaker on the down side.”
Watch video about related research on CEO compensation from Prof. Gopalan and Prof. Todd Milbourn that won the Olin Award in 2016.
