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Do Bonuses Change Corporate Culture??


JEast
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Of course a bonus changes individual behavior, but interesting observation/research from UK economist Andrew Smithers on how bonuses to executives is diminishing the capital spending plans of companies.  Capital spending as a percentage of a companies cash flow, on the whole, for cap ex is near or surpassed all-time lows from the '50s.  Add to the potential cultural change and the uncertainty that exist, there is no wonder that QEn+1 is not working.

 

FT Video:

http://video.ft.com/v/1796071957001/Bonus-culture-eroding-investment

 

Follow-up Article:

http://www.independent.co.uk/news/business/comment/anthony-hilton-how-bonuses-make-bosses-reluctant-to-invest-in-the-future-8163804.html

 

 

Cheers

JEast

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Cannot believe that guy who wrote "Valuing Wall Street" came up with this logic.

 

"Smithers recommends a simpler change. He suggests if bonuses are to continue they have to be linked to medium-term increases in physical output and investment. Nothing else."

 

This seems to be pretty much match the incentives of the Chinese Government. I would expect we would end up with value destroying "Growth" if such incentives are implemented. As long as GM produces "x" million cars and makes "y" dollars of capital investment the managers would be entitled to bonuses? Sales be damned?

 

Vinod

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Cannot believe that guy who wrote "Valuing Wall Street" came up with this logic.

 

"Smithers recommends a simpler change. He suggests if bonuses are to continue they have to be linked to medium-term increases in physical output and investment. Nothing else."

 

This seems to be pretty much match the incentives of the Chinese Government. I would expect we would end up with value destroying "Growth" if such incentives are implemented. As long as GM produces "x" million cars and makes "y" dollars of capital investment the managers would be entitled to bonuses? Sales be damned?

 

Vinod

 

This is a problem. You use metrics like EBITDA/cash from operations and managers abuse CAPEX. You use EBIT or a similar metric (like stock price) and they would not take a risk or even reinvest for the life of them.

 

There is no perfect metric, it all depends on the situation and what you want to achieve. Then you put the incentives.

 

Structure follows Strategy. Form follows Function.

 

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