The Art and Context of the Deal: A Balanced View of Executive Incentives

Over the past several years critics have charged that incentive awards are excessive, bear little relationship to organizational performance, and often prove detreimental to a company's success. This article argues for the importance of considering contextual factors before making judegments about the eeficacy of perfoance-based compensation. Analysis of one factor-the degree of business risk-uncoves a relationship taht chanllenges predications based on economics theroy. We might well assume that pay pakcages rich in stock options and other incentives help copanies respond to a high-risk business environment. Not so. Statistical analysis of 536 large U.S. companies shows that the more sucessful firms used higher salaries and lower level of incentive than their less succesful counterparts. This suggest we need to give great consideration to the whole ”employment deal”-incentives, salary, benefits, job security and the like-in relationship to the business enviornment.