The Advisors' Blog

– Broc Romanek

Here’s an excerpt from this article from Judith Samuelson of the Aspen Institute:

An unintended consequence of pay-for-performance is we treat companies as if they are in the airline business, except the only person who matters is the pilot—not the grounds crew, nor the quality control tinkerers, nor the guys who wrangled the ore and fuel from the ground, forged the parts, tightened the bolts and soldered the frame.

And especially not those who are served the food in the cafeteria or cleaned the restroom late into the night. This segment of the workforce is now basically hidden, working for contractors who trade in lesser skilled labor where benefits and income security are sacrificed in the name of competitiveness.

Meanwhile, because pay-for-performance is so weighted in stock, it incentivizes senior managers to think more about the shareholders than their direct reports or the labor and talent on which the enterprise depends. In the 1970s, shareholders took out about 50% of a company’s profits, while the rest was reinvested in the productive capacity of the firm, including R&D to employee training and rewards. Today, the shareholder gets over 90% between dividends and share buybacks. Today, a 60% or greater weight on equity or equivalents is the norm in pay packages.