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Publications
Publications
  • 2011
  • Working Paper
  • HBS Working Paper Series

CEO Bonus Plans: And How to Fix Them

By: Kevin J. Murphy and Michael C. Jensen
  • Format:Print
  • | Language:English
  • | Pages:55
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Abstract

Almost all CEO and executive bonus plans have serious design flaws that limit their benefits dramatically. Such poorly designed executive bonus plans destroy value by providing incentives to manipulate the timing of earnings, mislead the board about organizational capabilities, take on excessive (or insufficient) risk, forgo profitable projects, and ignore the cost of capital. We describe the causes of the problems associated with widely prevalent executive bonus plans, and offer our recommendations for fixing them. We focus on choosing the right performance measure, determining how performance thresholds, targets, or benchmarks are set, and defining the pay-performance relation and how the relation changes over time.

Keywords

Business Earnings; Competency and Skills; Cost of Capital; Executive Compensation; Risk Management; Performance Evaluation; Projects; Motivation and Incentives; Value

Citation

Murphy, Kevin J., and Michael C. Jensen. "CEO Bonus Plans: And How to Fix Them." Harvard Business School Working Paper, No. 12-022, October 2011.
  • SSRN

About The Author

Michael C. Jensen

→More Publications

More from the Authors

    • 2012
    • Faculty Research

    Putting Integrity into Finance: A Purely Positive Approach

    By: Werner Erhard and Michael C. Jensen
    • 2012
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    Author-Level Eigenfactor Metrics: Evaluating the Influence of Authors, Institutions and Countries within the SSRN community

    By: Jevin D. West, Michael C. Jensen, Ralph J. Dandrea, Gregg Gordon and Carl T. Bergstrom
    • 2011
    • Faculty Research

    Pioneers in Finance: An Interview with Michael C. Jensen - Part 1

    By: Michael C. Jensen and Ralph A. Walkling
More from the Authors
  • Putting Integrity into Finance: A Purely Positive Approach By: Werner Erhard and Michael C. Jensen
  • Author-Level Eigenfactor Metrics: Evaluating the Influence of Authors, Institutions and Countries within the SSRN community By: Jevin D. West, Michael C. Jensen, Ralph J. Dandrea, Gregg Gordon and Carl T. Bergstrom
  • Pioneers in Finance: An Interview with Michael C. Jensen - Part 1 By: Michael C. Jensen and Ralph A. Walkling
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