Unmet expectations and unacceptable results occur when these primary and secondary interests are at odds. We see all three of these actions taking place in corporate America every day. In fact, CEO turnover is increasing. Fast-forward to 1999, when 19.9 percent of the largest companies replaced their CEOs from the outside. Surely some of this turnover can be explained by retirement, but most is likely due to CEOs being evicted by disgruntled shareholders, who are demanding higher performance and acting faster when they don't get it.
Pay is linked to performance.
Granting stock options creates a high pay opportunity for a CEO, conditioned on strong future performance. Although we think stock options work well, there may be limits. Our recent research on overhang indicates that shareholder returns may actually decrease when overhang is too high. Pay design can cause better performance. There are other factors affecting that gap, which form the basis for many of the critical comments about executive pay.