Magazine article New Zealand Management

What a Performance Pay Back. (Upfront: News, Trends, People)

Magazine article New Zealand Management

What a Performance Pay Back. (Upfront: News, Trends, People)

Article excerpt

Tying top executives' pay to organisational performance isn't a bad thing, linking it to the share price is. Why? Because the share price of a company is not an indicator of "real management performance".

The financial market and the real market are disconnected, US business consultant Dr George Weathersby told an Auckland NZIM breakfast in the City of Sails last month.

Remuneration should be tied to the "real market". Tying reward to the share price encourages executives to produce results that manipulate the financial market and by the nature of that process they neglect the real market activities of the enterprise.

The real market is driven by consumer demand; the creation of goods and services; a long term view; innovation, quality and efficiency; and strategic response to competitors. The financial market, on the other hand, is driven by investor demand; future expectations (of profit performance); short term gains; financial gains on equity and the competition is just another financial instrument. And shareholders, institutional or individual, now hold stocks for a year or less before selling them.

So in opting to tie executive pay to share price performance boards of directors in the US, and by inference here as well, are the architects of the high level of corporate collapse and fraud in recent memory. …

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