Executive compensation is a critical strategic tool that sits at the intersection of corporate governance, talent management, and organizational performance. For public companies in particular, well-designed compensation programs are essential for attracting and retaining leaders capable of driving long-term value creation. When structured effectively—balancing fixed pay, short-term incentives, and long-term equity—these programs reinforce accountability, align executives with shareholder interests, and support a culture oriented toward sustainable performance.
However, executive compensation also carries meaningful risks. Misalignment between pay and performance, insufficient governance oversight, opaque disclosure practices, and shifting public sentiment can expose organizations to reputational, cultural, and regulatory challenges. While governance standards vary by company size and resources, public perception often does not account for these complexities. Research from the Rock Center for Corporate Governance at Stanford University finds that 86% of Americans believe CEOs of large U.S. companies are overpaid, a perception that organizations must proactively manage.1
Although no individual company can reshape national attitudes toward CEO pay, organizations can implement thoughtful compensation structures, clear communication practices, and strong oversight mechanisms to reduce risk and strengthen stakeholder trust. Below, we examine the key risks and rewards of executive compensation programs and outline practical steps that organizations can take to design programs that maximize strategic value while minimizing exposure to governance and reputational pitfalls.
The rewards of well-designed executive compensation programs
1. Attracting executive talent
The executive job market is increasingly competitive, particularly for C-suite and other senior leadership roles. Companies frequently recruit high-performing executives directly from competitors to close skill gaps, accelerate strategic initiatives, and gain an advantage in the marketplace. To succeed in these efforts, organizations must offer compelling incentives, ranging from competitive base salaries and performance-based bonuses to long-term equity, enhanced benefits, or expanded leadership responsibilities that create a clear path for advancement.
A well-structured compensation package that blends monetary and non-monetary incentives gives companies the flexibility to respond quickly when high-quality talent becomes available. This agility is critical in securing executives who can drive strategic outcomes from day one.
2. Retaining high-performing leaders
The same elements that attract top executives are also essential for retaining them. Compensation remains one of the most influential factors in an executive’s decision to stay or leave an organization. Particularly when they are consistently approached with competing offers. By providing a thoughtfully designed compensation package that aligns pay with performance, companies can reinforce their commitment to high-performing leaders, preserve institutional knowledge, and minimize the risk of losing key talent to competitors.
3. Aligning pay with performance
Executive compensation is commonly tied to performance metrics to help ensure that leadership decisions directly support the company’s strategic and financial goals. By structuring bonus plans with clear thresholds, targets, and maximum payout levels, companies give executives a transparent roadmap for what performance is expected and what outcomes unlock greater rewards. This design encourages leaders to prioritize the activities and decisions that will have the greatest impact on organizational success.
Performance expectations are typically tailored to each executive’s role. For example, a CEO may be evaluated on overall financial performance, while a Chief Marketing Officer may focus on growth or efficiency outcomes. While the specific metrics vary, the intent is consistent: when executives achieve their goals, the company benefits through stronger financial results, improved operational efficiency, and better long-term positioning.
This alignment helps foster a culture of accountability and performance, helping ensure that leadership incentives are directly linked to meaningful progress for the business and its stakeholders.
4. Driving shareholder value
Executives who make mission-driven decisions and inspire their teams to align with both short- and long-term company objectives help create shareholder value and drive sustainable results. They are responsible for ensuring resources are used efficiently and effectively. While specific duties vary by title, all executives share the responsibility of focusing on initiatives that foster growth. Their actions influence investor perception, expand market share, and open future opportunities, ultimately creating a pathway for long-term value. Strong leadership also reinforces corporate governance and balances the interests of shareholders, management, and other stakeholders.
Risks that can undermine executive compensation programs
1. Public perception of excessive executive pay
As mentioned above, executive compensation, particularly for CEOs, has faced growing public scrutiny among everyday Americans. This negative sentiment stems from several factors.
First, the CEO-to-worker pay gap continues to widen. Today, the average CEO earns roughly 290 times the salary of an average worker and nearly 10 times as much as the top 0.1% of U.S. wage earners.2
Second, CEO compensation is not always tied to strong performance. Many argue that CEOs and other C-suite executives often receive substantial pay packages despite not being demonstrably more skilled or competent than their peers. This is mainly because companies across multiple industries have adopted a “follow-the-leader” mentality with boards at companies benchmarking their compensation packages against peers, instead of basing their compensation performance metrics to their specific company’s growth.3
The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 in response to the 2008 financial crisis to institute more regulation in the financial industry. The law is extensive, but a provision in it requires publicly traded companies to disclose their CEO pay ratio so that they are transparent to investors.4 While leadership at the Securities and Exchange Commission (SEC) under the current administration has questioned whether this requirement is outdated, no legislation has currently been passed that would remove this information from being available to the public. Publicly traded companies, in particular, must be aware of investor and general public sentiment risk when establishing compensation packages for the C-suite.
2. Incentives that encourage risk
High bonuses can often be tied to unethical behavior in order to hit performance targets. These actions can have severe consequences for the company. For example, in 2020, Wells Fargo was forced to pay $3 billion to settle federal civil investigations because its employees had opened two million fake accounts without customized authorization in order to appease their management, which pushed them to meet a certain quota of new account openings.5
In organizations that have a frequent and short sales cycle, this issue can easily occur. As an organization, you must make sure that your employees are conducting business in ways that drive growth and revenue but also are ethical and in your clients’ and customers’ interest.
3. Short-term focus vs. long-term strategy
December marks the fiscal year-end for many organizations, meaning performance goals must be met before bonuses are awarded. This structure often creates pressure for executives to prioritize short-term results that boost performance metrics rather than focusing on long-term strategy.
Although this emphasis on short-term performance is usually embedded in company culture rather than driven by any one individual, executives may feel compelled to secure quick wins to demonstrate immediate value. Boards can find it difficult to “trust the process” when progress toward long-term goals offers no immediate proof of success. Because long-term initiatives carry inherent uncertainty and rarely provide quick rewards, executives may favor decisions that show short-term growth, both to secure their compensation and to maintain confidence in their leadership.
4. Internal pay inequity
Excessive executive pay doesn’t just generate negative sentiment from the public; it can also create resentment within an organization. The top 10 richest people in the world are all CEOs of publicly traded companies, with the richest, Elon Musk, having a net worth of roughly $386 billion.6
Although your company’s CEO and C-suite leaders likely earn far less than that, the gap between executive compensation and the average worker’s salary can still be substantial. Executives often have the financial flexibility to build generational wealth and provide for their families in ways that many employees cannot. This disparity can influence how workers perceive both their compensation and the organization as a whole. Research shows that when pay gaps become too large, lower-paid employees are more likely to disengage or leave their jobs entirely.7
If this sentiment spreads, it can lead to high turnover, reduced productivity, lower morale, and damage to both the company’s internal culture and its customer experience.
5. Regulatory and governance risks
The SEC is the governing body responsible for defining which executive compensation elements must be filed and disclosed to shareholders. Management at publicly traded companies must help ensure compliance with these rules, which require detailed reporting on the compensation of the organization’s principal executive officer, principal financial officer, highest-paid executives, and members of the board. These disclosures are primarily included in the company’s annual proxy statement (Form DEF 14A), which supports key shareholder voting decisions.
Beyond SEC filing requirements, companies must also comply with broad legislation that shapes how executive compensation is governed and reported. The Sarbanes-Oxley Act includes provisions related to corporate governance and accounting practices and requires CEOs and CFOs to repay certain compensation if the company’s earnings are restated. The Dodd-Frank Act further expands oversight by mandating shareholder “say-on-pay” votes, requiring disclosure of the CEO-to-median-employee pay ratio, and introducing pay-versus-performance reporting to demonstrate how executive compensation aligns with company results. It also established enhanced clawback rules–recently finalized by the SEC–that require companies to recoup incentive-based compensation from a wider group of executives whenever financial statements are restated, regardless of whether misconduct occurred. Together, these regulations increase transparency and elevate expectations for compensation committee oversight.
Failure to comply with these rules and regulations can result in substantial fines, investor lawsuits, imprisonment, loss of stock-exchange listing, and significant reputational damage.
Building an executive compensation strategy that supports long-term success
Executive compensation is most effective when it is equitable, transparent, and aligned with both performance and regulatory requirements. For boards and compensation committees, the process begins with gathering accurate data across HR, payroll, and performance systems to identify inequities, define compensation bands, and establish a clear pay philosophy.
From there, organizations can design incentive structures tied to meaningful performance metrics—ones that motivate leaders while supporting the company’s long-term goals. When this framework is paired with consistent evaluation, strong governance oversight, and thoughtful communication to stakeholders, executive compensation becomes more than a compliance obligation. It becomes a strategic tool that attracts talent, drives sustainable performance, and strengthens organizational trust.
For many business owners, however, designing a compensation structure that balances competitiveness, compliance, and long-term value can be complex. This is where a trusted advisor can provide meaningful support. By partnering with an experienced advisor, business owners can build compensation programs that not only reward leadership but also strengthen the organization’s long-term direction and financial health. If you are in the process of building or reevaluating your executive compensation structure, please don’t hesitate to contact us to learn how we can support you.
1. The Harvard Law School Forum on Corporate Governance. (2019, December 12). Pay for Performance. . . But Not Too Much Pay: The American Public’s View of CEO Pay. https://corpgov.law.harvard.edu/2019/12/12/pay-for-performance-but-not-too-much-pay-the-american-publics-view-of-ceo-pay/
2. CEO pay declined in 2023: But it has soared 1,085% since 1978 compared with a 24% rise in typical workers’ pay. (2024, September 19). Economic Policy Institute. https://www.epi.org/publication/ceo-pay-in-2023/
3. Executive pay is starting to look the same everywhere. That could hurt performance, study suggests. (2025, May 15). Virginia Tech News | Virginia Tech. https://news.vt.edu/articles/2025/05/pamplin-executive-compensation.html
4. SEC.gov | Remarks at the Executive Compensation Roundtable. (2025, June 26). https://www.sec.gov/newsroom/speeches-statements/remarks-atkins-executive-compensation-roundtable-062625
5. Lytle, T. (2024, March 27). The risks and rewards of employee incentive programs. SHRM. https://www.shrm.org/topics-tools/news/all-things-work/employee-incentives-go-wrong
6. James Royal, Ph.D. (2025, September 11). The world’s 10 richest people: The wealthiest have $100 billion or more. Yahoo Finance. https://finance.yahoo.com/news/world-10-richest-people-wealthiest-150953619.html
7. Gerdeman, D. (2018, January 17). If the CEO’s High Salary Isn’t Justified to Employees, Firm Performance May Suffer. Harvard Business School. https://www.library.hbs.edu/working-knowledge/if-the-ceo-s-high-salary-isn-t-justified-to-employees-firm-performance-may-suffer
