It is common practice for Fortune 500 chief executives to command exorbitant annual bonuses and other performance-based incentives. But does pay-for-performance maximize shareholder value and increase firm performance? Not according to this study, which finds that these incentive models fail to align management, shareholder, and employee goals. In fact, the authors point to a number of unintended consequences and inadequacies of pay-for-performance models, including a tendency for executives to focus on short-term goals at the expense of longer-term strategy.
Over time, performance-based incentives can have a negative effect on firm performance.