Thursday, November 03, 2011

CEOs and Incentives

CEOs often have little or no incentive to improve. Even in cases of very poor performance by the companies they lead, they continue to receive extremely high pay, often award themselves bonuses and, once they leave, are able to easily find similar work in other companies, no matter how bad they are at it. This is a sad state of affairs.

Qantas CEO Alan Joyce is a prime example of this. Increases in his pay are completely disproportionate both to the company's performance under his leadership and to the working conditions of the majority of Qantas employees. 

When share holders vote on pay increases it is rare for the recommendations of the board to be opposed. Those who cast proxy votes but don't specify any instruction by default allow decisions to be passed. Even if there were a high level of voter engagement it would be hard for small share holders to have much influence, since major share holders in companies tend to belong to the same social elites as the company leaders and share similar ideas. 

This is a serious issue of corporate governance. Companies themselves are unlikely to decide to make changes, as they lack any financial incentive. The interests of companies as a whole, as organisations of people working together to earn a living and achieve something, would be better served by restrictions on pay, share schemes, bonuses and benefits given to company leaders. Bonuses must be conditional if they are to be an effective incentive for improvement and for them to be meaningful, salaries and other benefits must be kept at levels where their recipients, though well off, will still feel a need for more income. 

The only way that restrictions can ever be put in place is through legislation. The chances of it happening are very slim. The most likely outcome is that we will be interminably stuck with poorly performing companies that serve largely as a means of funnelling funds into their CEOs' bank accounts.

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