Thursday, March 15, 2012

More "pay for NON-performance" or employing the right kind of people?

It is quite striking that almost all new hiring at Board-level continues to be for higher and higher sign-on bonuses and for bigger and bigger salaries, even BEFORE the person has proved herself or himself in her or her new job!

The British call this the "fat cat" syndrome.

This morning I had reason to recall the research done by Professors Margit Osterloh and Bruno S. Frey (both of the University of Zurich's INSTITUTE FOR EMPIRICAL RESEARCH IN ECONOMICS) which said:

"Corporate scandals are reflected in excessive top management compensation and fraudulent accounts. These scandals cause an enormous amount of damage, not only to the companies affected, but also to the market economy as a whole. As a solution, conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks. Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced. We suggest measures which clash with conventional wisdom: selecting employees with pro-social intrinsic preferences, de-emphasizing variable pay for performance and strengthening the participation and self-governance of employees. These
measures help to increase intrinsically motivated corporate virtue and honesty"
(published in: Ganna Grandori (Ed.) (2004). Corporate Governance and Firm Organization, Oxford; 191-211).

Apart from their own work in that chapter, here is just one piece of research quoted by them: "it is ...difficult to document that the increase in stock-based incentives has led CEOs to work harder, smarter, and more in the interest of shareholders.” (Murphy, K.J. 1999. Executive Compensation. In Ashenfelter, O., & Card, D. (Eds.), Handbook of Labour Economics: 2485-2563. Amsterdam: Elsevier) Sphere: Related Content

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