Paying chief executives big performance bonuses worth millions of dollars doesn't necessarily result in gains for shareholders, according to new research.
Modelling undertaken by Peter Cebon from Melbourne University's Business School and Benjamin Hermalin of the University of California's School of Business suggests that reliance on performance bonuses can result in top executives being too focused on short-term gains.
Cebon said the salaries of chief executives had skyrocketed in the past 30 years in the belief that big incentives created the best environment in which to grow a company.
"In this research we've challenged that assumption and have found that relying on performance pay for CEOs doesn't necessarily lead to higher profits," Cebon said. "Strategies driven by bonus payments can get in the way of long-term growth."
Bonus payments based on results encouraged boards to hide behind measurable goals, rather than developing a deep understanding of what executives were doing.
