Screed against modern management practices

by philg

A friend sent this this screed from Forbes about the folly of modern management practices, e.g., trying to maximize shareholder value and paying managers for pumping up the stock price rather than getting customers and profits. The article includes some interesting statistics, e.g.,

Meanwhile [despite higher CEO compensation per dollar of net earnings] real performance was declining. From 1933 to 1976, real compound annual return on the S&P 500 was 7.5 percent. Since 1976, Martin writes, the total real return on the S&P 500 was 6.5 percent (compound annual). The situation is even starker if we look at the rate of return on assets, or the rate of return on invested capital, which according to a comprehensive study by Deloitte’s Center For The Edge are today only one quarter of what they were in 1965.

The article concludes by relating an argument against stock-based compensation for managers: “For the last 35 years, stock-based compensation has been tried. It had the opposite effect of what was intended. We should learn from experience and discontinue it.”

Managers do seem to be doing great while shareholders continue to take a beating. I wonder if it is completely fair, though, to blame the managers for helping themselves to unearned stock options and grants. Capital is cheap now, thanks to the rapidly growing wealth and high savings rates in China, India, and other rising economies. Even if managers weren’t looting from the shareholders it isn’t clear why the returns on investment should be high. Money isn’t as scarce as it once was.

4 thoughts on “Screed against modern management practices”

  1. Part of the reason for stock-option-based pay and performance pay are taxes: (1) capital gains have lower taxes rates than income, so to give a CEO a take home of $X costs $1.25X as a capital gain and $2X as income (numbers approximate); (2) the Clinton administration made salaries above $1MM non-deductible as a corporate expense, so typically anything above that is paid as “bonus” or “commission,” for which the deductibility is maintained.

    Enter the law of unintended (but very predictable) consequences.
    J

  2. Paging grad students…. This seems ripe for academic or otherwise in-depth study. Executive compensation has been public long enough to collect comparative samples and compare earnings from companies run by CEOs with high stock-based compensation (where “high” is well defined) vs other CEOs (where “other” is smartly defined). It would just take a lot of time to gather the data. (I can’t imagine this hasn’t been done already.)

    Heck, if you were willing to accept a relatively short sample period it would be trivial (no?) to show the precise drag of stock based compensation on earnings, since they’ve been accounted for in recent SEC filings.

  3. This might be a good argument for incremental raising income tax levels to > 50% for incomes > 1 Million.

    A hand full of C level people are doing great at the expense of everyone else including society as a whole. Some of the practices they engage in are destructive so they can pump up stock prices and then reap the fat bonus’.

    I will offer as evidence the Compaq – DEC buyout; the HP – Compaq buyout; and finally the recent Oracle buying spree: JD Edwards, PeopleSoft, etc. Harmful to the IT industry while only benefiting a few.

    Another example of destructive practices revolving around pumping up stock prices are LBO (Leveraged Buyout) companies.

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