Incentivizing the C-Suite: Cash Is No Longer King, so What Works Now?

Bonuses and stock options have long been seen as the best incentives to motivate CEOs to achieve business outcomes. However, even as boards continue to toss increasingly more money into their company’s management incentive machines, a new study shows that cash, stock options and benefits incentives for CEOs no longer carry as much weight as they used to. 

So what does motivate executives to overperform, if it’s not cash? The study by researchers at Carnegie Mellon University and Seoul National University doesn’t point to better alternatives—it simply concludes that using cash-based incentives to incentivize rising performance is a nonstarter. 

The researchers canvassed 20 empirical studies dating back to 1980 that focused on financial incentives for achieving business targets at thousands of public companies. The studies measured those financial incentives against various performance indicators. The result: Bonuses for CEOs produced “a small predictive effect on the following year’s return on assets but did not affect other performance metrics such as next year’s market-to-book value or stock return.” Similarly, stock option incentives for CEOs produced “no effect” on future asset returns or on any market-related metrics.

That conclusion may upend decades of conventional thinking on using financial incentives to drive management performance.

“Despite the widespread use of financial incentives for CEOs as drivers of firms’ performance, our findings suggest it may be problematic to justify current CEO compensation arrangements based on anticipated market results,” explains Byeong Jo Kim, co-author of the article and associate professor of public management at Seoul National University’s School of Public Administration. “We recommend caution regarding current practices and considering alternative arrangements to enhance firms’ performance.”

Results and Impact Are the Real Drivers

Two critical areas of leadership may mean more to senior executives than cash incentives—a competitive mindset and career fulfillment.

“Performance—and not cash—is a bigger incentive for company leaders,” says Scott Gaba, COO at Goodwin Recruiting, a talent management firm in Cumming, Ga. “Executives are driven by a desire to be the best and to surround themselves with a great team driven to the same goals.”

Gaba says he’d rather have a great team surrounding him and get paid less than have an inferior team and get paid more. “The latter would ultimately make my life harder and hurt company performance,” he notes.

Good leaders also take great pride in helping others be successful and helping them achieve their personal goals, rather than solely focusing on financial benefits.

“If you love your company and are driven and determined to be the best and help others, then the performance and proper compensation will follow,” Gaba adds. “I would never promote or hire someone who is money driven over performance and people driven. Outstanding performance equates to strong compensation, but strong compensation does not equate to outstanding performance.”

Another key incentive for senior executives: making a mark and being an agent for change.

“In my work on executive motivation, I see a variety of primary on-the-job motivators for CEOs and C-level execs,” says Kristin Mann, senior vice president at Raines International, an executive search and leadership consulting company in Miami. ”While there are many individual motivators to consider, the C-level executives I work with most frequently point to one thing—the ability to have a noteworthy impact.”

Other top motivators include recognition and power, Mann notes. “Some executives pause when they hear the word ‘power.’ But this isn’t a negative thing—it’s the power to control resources to have that impact or the power to support team members as they achieve their goals,” she says.

There’s also the enticement of a real challenge.

“CEOs tend to be people who want to win. And if that win is in doubt, the opportunity can be even more enticing to demonstrate their capabilities to the board, the organization and the world,” Mann adds.

How to Improve Management Performance Incentive Programs

If cash isn’t cutting it, companies have other formal options to gauge performance and reward top executives. After all, employee retention is a massive issue with companies, particularly at the top and with high-performers. Consequently, company boards will want to get performance measurements right.

“Reported engagement across the workforce and customer satisfaction can certainly provide an indication of CEO motivation,” Mann says. “There’s a balance to be considered across financial and other metrics. Researchers could also review a CEO’s career journey, identifying differences between organizations and surveying the CEO for their reasons for taking each new position.”

Companies that prioritize the ability for executives to leave a lasting impression on the company and its industry can tie those measurements into management incentive programs.

“Executives often value their professional reputation and seek recognition for their achievements,” says Paul Bramson, CEO of The Paul Bramson Companies, an executive consulting firm in Atlanta. “Building a legacy and leaving a mark on their industry is important to many senior leaders.”

Ethical factors can also be added to the executive performance metrics list.

“Any comprehensive evaluation of CEO performance should include factors like ESG [environmental, social and governance] and inclusion,” says Cheryl Stokes, CEO at CNEXT Partner, a Raleigh, N.C.-based leadership development company. “Metrics such as employee engagement, innovation and market adaptation are also critical. CEOs should also be evaluated on their ability to lead sustainably and inclusively, reflecting their broader impact beyond just financial outcomes.”

Establish a Culture That Goes Beyond Cash

Management experts advise against relying on financial performance as a stand-alone measuring stick.

“Revenue growth, profitability and shareholder return are decent metrics but are flawed as the sole factors in evaluating a CEO’s performance,” says Dan Hawkins, founder and CEO of Summit Leadership Partners in Charlotte, N.C. “First, they are lagging metrics measured after the fact—sometimes years later. Second, so many factors beyond the CEOs’ influence impact these metrics, like the economy, interest rates and global crises.”

Companies can pivot to more effective and equitable performance measurement tracks.

“Effective boards also measure leading indicators for building a long-term, sustainable company and not just a singular great year,” Hawkins notes. “We often suggest expanded metrics, such as organization culture, employee engagement, succession readiness, ESG progress, specific strategic milestones, market share expansion and customer sentiment, i.e. NPS [net promoter score].”

The best way to build a performance culture is to merge leadership and financial metrics equally.

“It’s critical to ensure CEOs are motivated to build a great company with long-lasting financial results,” Hawkins adds.

Brian O'Connell is a freelance writer based in Bucks County, Pa. A former Wall Street trader, he is the author of the books CNBC Creating Wealth (John Wiley & Sons, 2001) and The Career Survival Guide (McGraw Hill, 2004).