Corporate & Securities Law

PERFORMANCE-BASED INCENTIVES ARE BAD BUSINESS

By Brett D. Sherman

By  Brett Sherman and Phyllis Barrack

Our just completed and admittedly informal study of incentive-based compensation to corporate management yielded some expected results, and some surprises too.

Our main finding pretty much confirmed what we have long believed:  Over the long-term, companies that seek to motivate management with huge short-term incentives nearly always hit a wall.

Although stock prices may fare well at times (when risks pay off), price also tends to slide back on a fairly consistent(when risks cause losses).  The evidence is pretty solid (at least to us) that short-term incentives actually harm the prospects of building shareholder value over time.

The magnitude of risks that management takes (i.e., the size of bet management places) depends on the nature of the incentive itself. When big money is on the line (like millions of dollars) management will nearly always reach for the brass ring, sometimes taking extraordinary risks in a go for broke attempt to meet incentive criteria.

Full post as published by Wall Street Law Blog on June 07, 2009 (boomark / email).