Incentive Pay for ExecutivesBecause executives have a much stronger influence over the organization’s performance than other employees do, incentive pay for executives warrants special attention. Assuming that incentives influence performance, decisions about incentives for executives should have a great impact on how well the executives and the organization perform. Along with overall pay levels for executives (discussed in Chapter 12), organizations need to create incentive plans for this small but important group of employees. To encourage executives to develop a commitment to the organization’s long-term success, executive compensation often combines short-term and long-term incentives. Short term incentives include bonuses based on the year’s profits, return on investment, or other measures related to the organization’s goals. Sometimes, to gain tax advantages, the actual payment of the bonus is deferred (for example, by making it part of a retirement plan). Long-term incentives include stock options and stock purchase plans. The rationale for these long-term incentives is that executives will want to do what is best for the organization because that will cause the value of their stock to grow. Researchers have tried in vain to find a link between the size of CEOs’ incentive pay and companies’ performance in terms of profits or other financial measures.37 In an analysis of CEO pay at 300 large U.S.-traded companies, none of the 10 top-paid CEOs worked for companies that attained the top 10% in terms of performance, even though their pay far exceeded the median. And in a study that compared historical CEO pay with the companies’ performance over the following three years, CEOs who earned in the top 10% saw their companies do increasingly worse than others over the three years that followed. Of course, incentive pay is generally tied to one’s past accomplishments, not (formally) to expectations. However, the highly paid executives in the study took more risks that did not pay off, so if the incentives made them overconfident, this type of pay was not meeting long-range objectives.A corporation’s shareholders—its owners—want the corporation to encourage managers to act in the owners’ best interests. They want managers to care about the company’s profits and stock price, and incentive pay can encourage this interest. One study has found that relying on such long-term incentives is associated with greater profitability.