The giant salaries awarded to today's high-profile managers are a burning issue in company management. These super bosses also receive performance-related bonuses and huge stock options, not to mention other perks such as massive pensions.
These elements are often supposedly linked to performance.
Although the cost of stock options cannot be hidden any more, it is unlikely shareholders will protest over the packages unless management cannot deliver an adequate performance.
While that sounds fair, it falls apart under examination. For instance, what exactly is 'adequate performance'? The usual answer is to point to a share price that outperforms the sector. But the sector might be meaningless as a concept – outdoing mediocre competitors with unimpressive figures isn't really an achievement. Also, the share price is no more under the management's control than the national economy's performance.
The share price is an unarguable figure for a specific moment in time and that is its only virtue.
Incentives work on the basic principle that the more you give, the more you get, from the shop floor to the top floor. Effective incentive schemes work by altering behaviour and, if the scheme is well designed, aligning that behaviour with the organisation's needs.
However, incentive schemes also steer behaviour in the wrong direction – for example, sales incentives that relate to turnover instead of profit give you a lot of unprofitable business.
Dishonesty can exist across a whole range of performance indicators. If questionable numbers have the potential to increase company management rewards, there is the incentive for wrongdoing.
Leadership, rather than management, is the trend these days. It is a vital aspect in optimising the effectiveness of an organisation. However, contrary to the view of many pundits, effectiveness might not be the ultimate goal of the top manager. I see maximisation being prioritised – a maximisation of personal reward.
This shift in emphasis has been a long time in the making. For years now CEOs and their cohorts have been paying themselves increasing amounts of money.
The unfortunate consequences are already apparent. Fortune magazine recently published a list of ten CEOs facing 'Herculean' challenges.
What's more, all the companies on the list are former superheroes: Citigroup, Coca-Cola, Gap, Merck, Microsoft, Morgan Stanley, Nike, Sony, Verizon and Wal-Mart.
Most of the CEOs of the above have inherited troubles from predecessors who took their massive rewards into affluent retirement.
The more misuse of corporate funds for personal wealth becomes the norm, the more the long-term health of the business is endangered, as successful long-term company management is passed over in favour of short-term gain.