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Regulating CEO paychecks could boost business profit

Ensuring CEO payments are capped and monitored could make businesses more profitable, according to a new study from the University of Melbourne.

The research, by Dr Peter Cebon and the University of California’s Dr Benjamin Hermalin, found that performance bonuses could be to blame for the lack of long-term strategies in some business and the trend of executives chasing short-term gains.

Australia’s top CEOs often earn $7-$10 million every year in performance bonuses, which Dr Cebon says doesn’t necessarily help their companies.

“We’ve seen CEO salaries skyrocket in the last 30 years. That is based on an assumption that these high incentives will create the most profitable environment for a company’s growth,” Dr Cebon said.

“In this research we’ve challenged that assumption and have found that relying on performance pay for CEOs doesn’t necessarily lead to higher profits.”

Dr Cebon said bonus payments can have a handing in driving “inappropriately simple relationship between executives and boards,” which stops boards from analysing CEO decisions and pushes them to focus on simpler, measurable goals.

“This discourages CEOs from pursuing strategies where the results are harder to measure, such as building organizational capabilities, or pursuing high value, high risk innovations,” Dr Cebon said.

“Those strategies are often much more valuable in the long-run.”