Shocking news: Execs do what they’re paid to do

From Matthew Yglesias’s column in Slate:

In theory, executive compensation schemes linked to stock market performance are supposed to focus managers on the long view. But in practice, the opposite seems to be the case. In an impressive paper published in April 2013, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker found that publicly traded firms systematically under-invest compared to privately held ones. The effect is larger in sectors where stock market swings are more closely tied to quarterly earnings reports, indicating that what they call “managerial myopia” is likely the culprit. In other words, when you pay executives to increase the share price, they focus on increasing the share price—even when that means focusing on headline numbers in the next quarterly financial report rather than on the long term.

Changes their orientation, in other words. If you read this closely, you can see the effect of incestuous amplification: “Of course our strategy is working! Can’t you see the share price going up every quarter?”

To paraphrase Yglesias’s argument, companies that don’t obsess on quarterly profit growth open up a range of options. If you read his entire column, you can see that the real secret of Amazon’s continued success is that it uses these options to operate inside customers’ and competitors’ OODA loops.

6 thoughts on “Shocking news: Execs do what they’re paid to do

  1. I’ve posted several times recently with regard to IBM

    Stockman in “The Great Deformation: The Corruption of Capitalism in America” pg464/loc9995-10000:

    IBM was not the born-again growth machine trumpeted by the mob of Wall Street momo traders. It was actually a stock buyback contraption on steroids. During the five years ending in fiscal 2011, the company spent a staggering $67 billion repurchasing its own shares, a figure that was equal to 100 percent of its net income.

    pg465/10014-17:

    Total shareholder distributions, including dividends, amounted to $82 billion, or 122 percent, of net income over this five-year period. Likewise, during the last five years IBM spent less on capital investment than its depreciation and amortization charges, and also shrank its constant dollar spending for research and development by nearly 2 percent annually.

    … snip …

    New IBM Buyback Plan Is For Over 10 Percent Of Its Stock
    http://247wallst.com/technology-3/2013/10/29/new-ibm-buyback-plan-is-for-over-10-percent-of-its-stock/

    from above:

    The company has represented that its dividends and share repurchases have come to a total of over $159 billion since 2000.

    … snip …

    IBM Asian Revenues Crash, Adjusted Earnings Beat On Tax Rate Fudge; Debt Rises 20% To Fund Stock Buybacks
    http://www.zerohedge.com/news/2014-01-21/ibm-asian-revenues-crash-adjusted-earnings-beat-tax-rate-fudge-debt-rises-20-fund-st

    another area is employee retirement
    http://www.ibmemployee.com/RetirementHeist.shtml
    lots of details about different ways corporations came up with for raiding pension plans
    http://www.amazon.com/Retirement-Heist-Companies-American-ebook/dp/B003QMLC6K

  2. “you can see that the real secret of Amazon’s continued success is that it uses these options to operate inside customers’ and competitors’ OODA loops.”

    True enough, but the roar of the insurgency going inside those loops must be deafening to Belzos. Does he risk isolating himself and his company from the “roar”, or does he and the corporate powers to “Be”, just lose their hearing, from time to time?

  3. There is a great deal at stake here Chet, and the rest of you guys.
    This describes one element of the larger malaise.
    It’s coming down the the survival of western civilization as we recognize it.
    It’s a crisis of political and corporate leadership, that has spread like cancer,
    through every level.

    • “It’s a crisis of political and corporate leadership, that has spread like cancer,
      through every level.”

      That is shocking news. Do you mean that executives “do” what they’re paid to do?

    • Right, so the only real question here is how is the health of those executives. i mean they seem to be making a living wage, but Amazon’s best customers almost shut down the one thing keeping Amazon secure, the U.S. government, while at the same time destroy that which gives Amazon its wealth, the American economy.

      Knowing that, how does one sleep without knowing that, drugs? Or do you plan to change economies while at the same time change security?

      • “An influential corporate chief executives group again weighed in on the matter, urging congressional leaders in a letter to swiftly pass a debt limit increase to avoid uncertainty and a potential increase in borrowing costs.”

        “”I’m confident that the United States is not going to default on its debt, and we will resolve the need to increase the borrowing authority of this country prior to any deadline that the Treasury issues,” Cantor said on Thursday on the House floor.”

        Cantor should make, at least, one group of executives sleep better at nights, but at what sacrifice, a place in the insurgency? #newleadershipcoming

        http://in.reuters.com/article/2014/02/07/usa-fiscal-idINL2N0LC1PV20140207

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