Executive Summary
This report examines the rise of executive compensation plans tied to market capitalization and stock performance. It analyzes their historical development, theoretical justifications, and practical consequences. The core argument is that such plans, while designed to align executive and shareholder interests, can create significant negative externalities. These externalities represent costs to customers, employees, and the public, often resulting from an incentivized neglect of other critical business functions.
This report introduces the “Externalities of Focus” theory. This theory hypothesizes that a singular focus on market value rationally leads to the systematic de-prioritization of essential, non-financial functions like customer service, quality control, and safety protocols.
Key findings include a historical analysis tracing the shift from stable, salary-based pay in the mid-20th century to the equity-driven, high-stakes packages of today. This trend was accelerated by the shareholder value movement and unintended regulatory consequences. Case studies of “mega-grants” at Tesla, Axon, and Uber reveal a pattern where extraordinary market cap growth coincides with a high volume of safety investigations, regulatory actions, and customer complaints.
The main recommendations are directed at boards and institutional investors. Key proposals include:
- Diversifying executive performance metrics to include a balanced scorecard of financial and non-financial goals.
- Implementing robust clawback provisions for misconduct or major compliance failures.
- Strengthening board independence.
For investors, the report advocates for more critical use of “Say-on-Pay” votes. It also calls for pushing for expanded SEC disclosures that place key non-financial data alongside traditional financial metrics. This would provide a more holistic view of executive performance and its true cost.
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