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Economics

We’re Paying CEOs All Wrong

It’s about how, not how much.
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Photographer: Ivan Bliznetsov/Getty Images

Fred Whittlesey, a compensation consultant for more than three decades, would like his colleagues to take more seriously the weird ways our brains work. In a 2009 paper, he argued that when corporate boards decide how to pay chief executive officers, it’s best to heed behavioral economics, which shows that people are irrational when interpreting and acting on financial data.

Whittlesey, now 58, was blunt. Existing compensation plans had “no empirically demonstrated validity.” Rather, they were a hodgepodge of reactions to “accounting rules, tax law, shareholder requirements, and legal considerations.” Missing from the equation: any assessment of how millions in cash and stock motivate the executive brain—or don’t.