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Beyond financial performance: is there something missing in executive compensation
schemes?
Pascual Berrone and Luis R. Gomez-Mejía |
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This article offers a theoretical perspective that draws on stakeholder theory as an
alternative framework to the neoclassical model to analyze executive compensation schemes.
We compare the traditional approach to our framework and present a set of proposition which
suggest that executive compensation schemes should be designed in such a way that include not
only financial goals but also additional criteria linked to the interests of different stakeholders so
firms can evolve sustainably. We discuss aspects such as perverse incentives, the risk of
maximizing a single criterion to reward executives, and the benefits of multiple goals to assess
managerial performance. We also analyze the role of boards of directors as monitors on social
issues, the importance of clear and explicit pay policies, and the relevance of contextual factors
when studying the link between social performance and executive compensation. The article
concludes with practical and empirical implications derived from our framework.
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