Managerial Compensation and Firm Performance When other direct

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Managerial Compensation and Firm Performance

When other direct control mechanisms do not function very well, there may be a need for special incentives that induce managers to act in the interests of shareholders i.e. to maximize profits. As explained on page 229, this is often undertaken through the design of executive remuneration packages. In practice this usually involves tying managerial compensation to the performance of the firm, in the form of salaries, bonuses, and stock options. In this way, managerial wealth is subjected to at least some of the same risks to which shareholders and the firm are exposed. Therefore, linking managerial compensation to firm performance has been adopted in many countries as a way of aligning the interests of managers with those of shareholders.

However, managerial compensation has become a hotly debated issue, particularly in the US , where the last 10 years have seen an explosion in the level of managerial pay. When you couple this with the government bail outs that occurred after 2008, the perception of the relationship between industry and government has fostered an entanglement that some argue places business profit ahead of people. For instance, when President Dwight Eisenhower named Charles Wilson - then the president of General Motors - to be his secretary of defense in 1953, some senators considering the nomination wondered whether Wilson could distinguish his loyalty to GM from his obligations to the country. Wilson assured them that he could, but then added that he did not think a conflict would ever come up. "For years I have thought that what was good for the country was good for General Motors, and vice versa," he said in his confirmation hearing. Watch the following video and discuss under what conditions, if any, should the government get involved in industry.