In the News: Pay for Performance, or not?
In this crazy upside down mess known as Wall St, many people, from the Middle American to the scholar to the economist, believe that linking pay to company performance is the only way to ensure to employee sensitivity towards the corporation and, ultimately, its shareholders. This way of thinking, however, is clearly flawed. Consider this: if a company directly links an employee’s compensation to the performance of the firm, then the employee will generally be inclined to be risk averse. Sure, this sounds good off the cuff, but if an employee is averse to risk, then shareholder wealth will never be maximized. On the other side of the coin, if the company is doing poorly, then the employee should believe, and rightfully so, that his or her pay will be next to nothing. Therefore, the employee should theoretically take the greatest possible risk, because, technically, the employee has nothing to lose.
I think a far better solution would involve tying compensation to performance in terms on bonus, and only to a degree – to tie 100% will only, in my humble opinion, lead to ultra conservative actions or ultra risky actions – the entire game will lack common sense and shareholder judgment, which is what we are trying to bring back, not move further from. And yes, some employees will still take risks under this alternative, but that is why we have credit committees and supervisory groups to monitor exactly how risky these bankers or traders are becoming – too risky, cut it off. If we can all learn from our mistakes, and not try to fix them by making new ones, maybe we can actually get this machine running again.
Don’t take my word for it though, check out the article on Clusterstock (link is below) – even if you don’t agree, it’s worth a look. As usual, comment away, I love a good debate.
