Friday, 13 March 2015

Pay For Performance!

It's almost impossible today to watch the news without reports about the salaries and bonuses awarded to chief executives companies. When it comes to the banks the bonuses awarded seems to be cascaded down several tiers. Pay and bonuses is now an ingrained culture rather than a reward for success. Being paid a salary that is commensurate with performance also suggests that there is some form of risk.

When things go wrong in business the senior management seem to be insulated away from the consequences. High pay and big bonuses and pension leaving them with a nice nest egg for the future. However, for the average employee living on pay from month to month. It can be a complete loss of employment with all the social problems that brings with it. 

There is a second myth that business in general can align executives actions with success through company stock options. Supposedly the stock options are a way to link executives' financial interests with the shareholders interests. However, when a business starts to falter and the future looks increasingly bleak the first to know is the CEO. With ample time to find alternative employment. The executive can leave and now with the option to sell the stock. For the CEO its a win win situation.
I fail to see the logic in a topsy turvy system. How can an overall salary based on bonus/pension/stock option make a CEO and his senior management team make smarter decisions. Especially when there is no risk in it for them. Ask yourself a simple question 'If performance related pay is such a good thing, why is it not generally available to every employee.' Now turn the topsy turvy logic on its head. If you were to pay all the employees performance related pay. Where the CEO's salary/bonus is set as a proportion of what was paid to employees in performance pay. Would that not make much more sense. After all, were all in it together, or are we. 
I know that the employees have a much bigger stake in the success of a business. They have much more at stake in their monthly take home pay than any executive circling on the CEO roundabout. Chief executives who get penalised through pay for questionable events and making bad choices. The same as it would be for an employee. That hurt the business performance in any way and subsequent penalties makes much more sense to me.

Instead, what happens is the executive bonus is set against a performance mark, that often bears no relation to the overall performance of the business.  Often the performance requires no effort from the executive to achieve. Essentially they can't fail. The only real way for CEOs to truly have their interests tied to the business performance. That means the CEO bonus will come in the form of shares, not stock options. Its a simple expedient, an executives will act more like an owners when they have a financial stake in the business and the business performance. As a share holder holding stock and not stock options that's exactly what they become.

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