An article yesterday titled ‘The Quick Buck Just Got Quicker’ reports James F. Reda & Associates recently conducted a study of changes in pay packages by 191 of the U.S. largest companies which says “changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie” – this in the face of a statement made in the article (by its author) that “With outsized and corrupting corporate pay packages under scrutiny, you might think that companies would be rushing to tamp down their compensation plans. Making sure that pay actually rewards long-term performance, for example, seems a fairly obvious way to allay shareholder fears that managers are lining their pockets rather than safeguarding their companies”.

So what does one take from this.  At least two things:

•    first, as Mr. Reda is reported as saying, shorter-term compensation incentives invite higher risk behavior on the part of executives;

•    second, and in my view far more importantly, the logical reason Boards of Companies might approve compensation plans that pay more incentive for near-term results is because they think that will motivate executives to produce better short-term results.  The question is, at what long-term cost to the company’s economic well-being.  For example, an obvious way to improve near –term results (both in earnings and cash flow) is to postpone capital spending.  What effects does this and other ‘rob Peter to pay Paul’ management strategies have in the longer term context of a company’s economic well-being – nothing but negative ones.

To me, to the extent near-term incentives are replacing long-term incentives is simply one more reason to despair over the ‘short-term gain’ for ‘long term pain’ attitudes that seems to have prevailed in America (particularly) after the year 2000.

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