The Wall Street Journal featured an article this morning about the increasing use of “pay for performance” for executive compensation. In other words, the company has to reach certain financial targets in order for the executive to receive restricted stock. The article focuses on whether the targets are real, but the more interesting question for me is what incentives this compensation structure creates. Ethics students, what dangers do you see in this “pay for performance” structure?
2 Comments
Nick Li posted on September 12, 2013 at 11:40 pm
We discussed this issue last semester in my FE442 class. What a lot of executives and managers would do would be to make decisions that benefit the company in the short-term (to get their yearly performance bonuses) but could potentially prove to be harmful in the long run. To combat this, a lot of companies now have a deferred compensation system where bonuses are paid over the course of many years to hold the manager accountable for his actions long-term.
However, when this system was implemented, a lot of talented people who were in it for the money jumped ship into shadow banking (private equity, etc.) which is a lot less strictly regulated and doesn’t impose restrictions like a lot of the big corporations.
Stephanie Moyal posted on September 30, 2013 at 12:44 am
In theory, incentive systems sound great. The harder you work, the more you shall receive. However, when you analyze this, it could backfire ethically speaking. Taking the classic example of the 2008 financial crisis when banks were issuing junk loans to anyone who could sign a piece of paper just to get more money coming into the bank. Banks were more profitable and CEOs were receiving big pay offs. They didn’t do anything to stop the madness because at the end of the day, they were getting richer and the rest didn’t matter. If we had a system in place that rewarded the most financially sound bank that had the most secure mortgages and investments, that could be an incentive system that would work in favor of the business and the economy.