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Directors’ pay vs management theory
The justifications for spectacularly high pay for the upper ranks of management, particularly when in the form of options, are that high pay is needed to attract talent, and that performance related pay is needed to align directors interests with those of shareholders. There are flaws in this argument.
The implicit assumption behind these arguments is that money is what motivates people to do their work well. This is simply not what management theory suggest. The important motivators lie in the work itself. Two classic descriptions of this as Herzberg’s motivation factors and Maslow’s hierarchy of needs. Given that directors of large companies invariably have more than adequate pay, and are in fulfilling and interesting jobs what also provide direct fulfilment of esteem needs, pay should not be a prime motivator.
The other problem lies in the difficulty of actually coming up with incentive schemes that acually do align shareholders and directors financial interests. Share options are common, but they tempt directors to manipulate the share price at key times (when the options vest) and to focus on particular time scales, perhaps storing up problems for the long term to boost the short to medium term share price.
I also wonder whether concentrating on high pay as a reward will help a company attract the greediest managers, rather than those motivated by the job itself. This would not be a good thing for shareholders because there are many ways in which managers can benefit financially at shareholder’s expense: over-expansion (to justify more money for running a bigger company), manipulation of remuneration (re-pricing options, talking up share prices at critical times), deceit and fraud, etc.
As a final thought, here is what economist JK Galbraith thought of the issue:
The high salary of the chief executive of a large corporation is not a market reward for achievement. It is frequently in the nature of a warm personal gesture from an individual to himself.
Comments(3)
[…] An article by Robert H Frank on trickle down economics in the NY Times points out that there is little correlation between high earners pay and how hard they work. This is backing for my views on directors pay. […]
[…] Even better, simply pay them a fixed salary like everyone else. I have previously pointed out the inconsistency in the means used to motivate senior management compared to everyone […]
[…] I think Eric misses is an insight from management theory, that I have mentioned before. The most important motivators are those intrinsic to a job, not extrinsic factors like pay. A CEO […]
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