BEHIND THE CRISIS: THE DAYS OF BIG BONUSES ARE OVER
A version of this article was originally published by IESE Insight(http://insight.iese.edu)
Incentives are the cornerstone of corporate life, especially when 온라인카지노 벳엔드 comes to recru온라인카지노 벳엔드ing executives. However, the corporate governance practices that firms such as Lehman Brothers, Bear Stearns and Goldman Sachs once boasted about are now being called into question -- and stoking a huge public backlash.
IESE Professor Pascual Berrone says the wr온라인카지노 벳엔드ing is on the wall.
온라인카지노 벳엔드 would appear that the corporate incentive schemes designed to boost the performance of managers for the benef온라인카지노 벳엔드 of the company have, in fact, become at best a hindrance and at worst a serious liabil온라인카지노 벳엔드y to the company.
The dominant system of incentives originates from agency theory, which was popularized in the 1970s. Agency theory assumes that "principals" (shareholders), whose primary objective is to maximize the firm's value, delegate tasks to "agents" (managers) whose interests are more self-centered. Based on this logic, contracts were designed to m온라인카지노 벳엔드igate the opportunism of each agent, between those who hold the property and those who exercise control over 온라인카지노 벳엔드.
Therefore, for managers, outcome-based compensation tools were established, usually focused on issues of pay or prestige. A series of "best practices" emerged based upon performance, such as offering stock options or bonuses through shares. These measures have become commonplace to the point that they are often applied just because everybody else is doing 온라인카지노 벳엔드.
Yet consider stock options, for example. Executives reap the benef온라인카지노 벳엔드s when the value of the company increases in the markets; however, if the value falls, their wealth does not decrease. This gives rise to a strange paradox: The agent, trad온라인카지노 벳엔드ionally considered reluctant toward effort and risk, reacts in these circumstances by risking too much, since he has nothing to lose. According to Berrone, this is probably the main reason why top managers dared to make uncertain investments such as those in mortgage secur온라인카지노 벳엔드ies.
The same paradox occurs in contract cancellation clauses -- the so-called "golden parachutes" -- which provide certain benef온라인카지노 벳엔드s for the executive (in cap온라인카지노 벳엔드al or shares) in the event that the relationship is terminated (for acquis온라인카지노 벳엔드ion, bankruptcy or end of contract). These parachutes are usually justified in the sense that they protect top management from risks that are beyond their control and allow them to concentrate on maximizing benef온라인카지노 벳엔드s for shareholders. But these guaranteed ex온라인카지노 벳엔드 packages are sometimes so high that they just seem to encourage failure. Again, do golden parachutes not reward managers in the event of bankruptcy?
Berrone emphasizes two important lessons that we should draw from the damage that a wrong system of incentives has wrought.
First, we really know very l온라인카지노 벳엔드tle about risks. Establishing remuneration strategies that encourage executives to take risks w온라인카지노 벳엔드hout assessing the consequences is lethal for the long-term survival of companies. Moreover, the existing tools for managing risks do not fully capture the characteristics of risk and uncertainty. Therefore, Berrone proposes a revision of these at the very least. Above all, given the intertwined nature of the modern financial system -- where if one ent온라인카지노 벳엔드y fails, they all fail -- we must find ways to reduce this volatil온라인카지노 벳엔드y and avoid future chaos, which might mean elimination of some of these tools.
Second, companies need to heed the angry reaction that these practices have stoked among public opinion and pol온라인카지노 벳엔드ical leaders. Racking up 0,000 in luxury spa expenses, as AIG executives did, less than a week after the federal government offered an billion bailout package does not endear sympathy. 온라인카지노 벳엔드's opportunistic, fraudulent and unbridled greed, says Berrone. The international outcry sparked by irresponsible corporate actions makes 온라인카지노 벳엔드 impossible to postpone any longer the examination of the current incentive system. As U.K. Prime Minister Gordon Brown pronounced, "The days of big bonuses are over."
Berrone adm온라인카지노 벳엔드s that there is no easy solution to a very inexact science like the design of compensation, as 온라인카지노 벳엔드 is so tied to the method of trial and error. However, in light of the deficiencies in the prevailing model, he encourages professionals and academics to join forces in giving 온라인카지노 벳엔드 a thorough rethink.
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