Tying top executives’ pay to organisational performance isn’t bad thing, linking it to the share price is. Why? Because the share price of company is not an indicator of “real management performance”.
The financial market and the real market are disconnected, US business consultant Dr George Weathersby told an Auckland NZIM breakfast in the City of Sails last month.
Remuneration should be tied to the “real market”. Tying reward to the share price encourages executives to produce results that manipulate the financial market and by the nature of that process they neglect the real market activities of the enterprise.
The real market is driven by consumer demand; the creation of goods and services; long term view; innovation, quality and efficiency; and strategic response to competitors. The financial market, on the other hand, is driven by investor demand; future expectations (of profit performance); short term gains; financial gains on equity and the competition is just another financial instrument. And shareholders, institutional or individual, now hold stocks for year or less before selling them.
So in opting to tie executive pay to share price performance boards of directors in the US, and by inference here as well, are the architects of the high level of corporate collapse and fraud in recent memory.
Ironically, despite trillions in lost equity, 90 percent plus decline in share prices and the largest number of bankruptcies since the 1930s’ Depression, US GDP grew at more than two percent last year and the pundits expect Wall Street to recover quickly once the Iraq war issue is out of the way.
Some 72 percent of American CEOs are either “confident” or “somewhat confident” about the future. According to PricewaterhouseCoopers global survey CEOs rank “over regulation” as the greatest single threat to growth. After that they rank global terrorism, war, oil prices and price deflation as threats.
The key business levers CEOs identify to capitalise on opportunities are first and foremost innovation and then leadership/vision. High quality employees rank next.
When it comes to individuals that Americans trust, recent CNN/USA Today/ Gallup poll found the CEOs of small businesses were trusted by 75 percent of the population against large corporation CEOs on 23 percent. Car dealers were trusted by just 15 percent. And 73 percent of Americans trusted military officers.
