Intended and Unintended Consequences of CEO and Top Management Team Compensation

Executive compensation has become a major issue in contemporary society, particularly with the lavish compensatory packages that today seem to be the standard rather than the rule. The aims of this chapter are to discuss different components of executive compensation and more importantly the impact that these components have on executive behavior and firm performance. The chapter begins by addressing both the theoretical and practical intentions of different aspects of both individual aspects of executive compensation packages and then from a more macro view, the intentions of behind inequality of the overall executive level compensation structure within the firm. Following this discussion, focus is turned to the more ominous unanticipated outcomes that have been demonstrated to be produced through different aspects of compensatory packages and structures. Generally, this chapter addresses both how individual executive compensation packages and firm level compensation structure achieve intended benefits (i.e., goal and risk alignment between shareholder and executive) while also eliciting unintended consequences (i.e., negative effects of risk taking, fraudulent reporting, earnings manipulation, inter-team conflict, decreased employee satisfaction, decreased firm performance).