CEO billion-dollar pay packages are disasters-in-waiting; they deliver what’s on the tin

sKey topics:Mega stock awards for ultra-wealthy CEOs lack true performance incentiveExcessive pay packages often harm companies and shareholdersBoards urged to choose CEOs driven by passion, not just wealth.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Gautam Mukunda.The $29 billion stock award Tesla Inc. provided Chief Executive Officer Elon Musk to run the maker of electric vehicles is striking both for its sheer magnitude (it’s larger than the gross domestic product of more than 70 countries) and because it’s the starkest example of the new phenomenon of boards granting CEOs enormous equity grants when they already have vast equity ownership.The logic behind these packages – that they incentivise CEOs to do their best - falls apart on close examination. The reality is that these incentives encourage behaviours that are bad for companies and shareholders.With the average compensation for the CEOs of the largest US companies soaring past $20 million per year, boards are finding ways to reward superstar executives with multiple orders of magnitude more. These packages are being granted simply because more is better than less (or, perhaps more pointedly, the mega stock grants serve as status symbols in CEO peer groups), even when more has ceased to have any real meaning.Figma Inc.’s Dylan Field owned almost 60 million shares of the design software firm before its $1.1 billion initial public offering in late July. But he was granted restricted stocks units as part of the IPO that, depending on performance, could be worth almost $2 billion. Broadcom Inc.’s Hock Tan has received equity awards since 2021 that, combined with ongoing vesting, are worth more than $2 billion. Warner Bros. Discovery Inc.’s David Zaslav, having already received stock options worth more than $150 million, is set to receive tens of millions more annually after the company splits.What’s most striking about these awards is that they are going to people whose wealth is largely already beyond imagination. Musk has a net worth of around $370 billion. Absent some epic financial mismanagement, there is simply no way that adding to his wealth will materially affect his life, or for that matter, those of his not-yet-born great-grandchildren. Similarly, Field was already a multi-billionaire before his latest award from Figma. Zaslav is a relative pauper at a mere $400 million.And yet, the logic behind such mega awards – that they incentivise the CEOs who receive them to perform their best and prevent them from leaving for a competitor – fall apart on reflection. For one, these CEOs already own enormous stakes in the companies they lead. If they double the value of the company, they will double the value of their own stake. If additional billions are what it takes to get them to do their job, the companies don’t have to grant them a single extra share. It’s already baked in..Read more:. Elon Musk seeks Tesla shareholder approval for $56bn pay package.Similarly, if these CEOs are so valuable that losing them would have devastating effects on a company’s value, then that would have the same effect on the net worth of the CEOs. In other words, CEOs who demand such packages are essentially like hostage-takers who put guns to their own head and threaten to pull the trigger.Paying CEOs enormous sums isn’t bad just because it wastes money (although at this scale, the amount of money is significant for even the largest companies), or because it further separates CEOs from their employees and customers (although it is surely difficult for someone for whom billions of dollars is not enough to relate to the median American, whose net worth is less than $200,000).The biggest problem is that such grants incentivize the wrong behavior. These are pay packages that enhance CEOs’ status at the expense of the companies they lead. Such self-aggrandizement is exactly the sort of behavior boards should want to avoid. A brilliant study by Arijit Chatterjee and Don Hambrick showed that the more narcissistic a CEO is (measured elegantly by factors like the size of the CEO’s portrait in the annual report), the more volatile a company’s performance, while a meta-analysis of studies on CEO narcissism finds that CEOs with such behaviour traits tend to hurt firm performance.What can boards do? First, they should remember that they work for the shareholders, not the CEO, and learn to say no. Board members who displayed such bad negotiating skills in their non-director roles would soon find themselves removed from those positions. They should apply the same skills when evaluating CEO compensation demands.Perhaps more profoundly, boards should find CEOs who care about the work, not just the money. There’s nothing wrong with wanting to be rich, but if it’s the only thing you care about, you probably shouldn’t lead most companies, as legendary automotive executive Robert Lutz described in his book Car Guys vs. Bean Counters. Alan Mulally, the former head of Ford Motor Co. and perhaps the finest American CEO of his generation, is an aeronautical engineer so in love with airplanes that to this day, long after leaving Boeing Co. for the automaker in 2006, his signature is accompanied by a sketch of a smiling jumbo jet. The CEOs Boeing chose instead of him seemed more interested in making their quarterly numbers than they were in making plans, and Boeing paid the price for that misjudgment.Especially with internal candidates, boards have ample opportunities to get to know the real person. They should use them to find CEO candidates whose highest ambition is making great products..© 2025 Bloomberg L.P.

CEO billion-dollar pay packages are disasters-in-waiting; they deliver what’s on the tin

sKey topics:

Related Stories