Executive pay should be reformed not by focusing on the sums paid, but on the structure of pay packages, according to a leading business academic.
Professor Alex Edmans writes that chief executives are best incentivised with long-term equity.
“Evidence in peer-reviewed journals shows the benefits of reforming pay structures. Granting CEOs long-term equity, for example, means not only higher future profitability, but also innovation and stewardship of the environment, as well as customers, society and, in particular, employees.
“In contrast, short-term equity induces CEOs to cut investment to meet earnings targets,” writes Professor Edmans in the Financial Times.
All employees should also receive equity. Professor Edmans believes that studies “change only the CEO’s contract and keep everything else constant, addressing concerns that the individual at the top matters little in companies’ overall success because he or she is only one employee”.
“Other staff matter too, and should also share in success. One way to achieve this is to give equity to all employees, not just top executives.”