
Performance-pay Perplexes - davidw
http://www.newyorker.com/talk/financial/2007/11/12/071112ta_talk_surowiecki
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pg
This is an interesting point. If you pay for performance, you have to measure
performance over a long enough time. Stock options have a similar problem,
actually. What you should really do is pay people not for what they do to the
stock price today, but what they do to it several years from now.

~~~
soundsop
When you create incentives, you always have to be careful to find out exactly
what scenarios maximize the rewards of those incentives. These scenarios may
be unexpected (Freakonomics touches on this alot). Creating incentives that
are short term or simply give rewards in the face of egregious errors is why
CEO compensation today is a scam. Many CEOs don't expect to be at a company
longer than a few years, so their horizon for increasing the stock price is
short term, often hurting the company in the longer term. You can see this
when companies have firesales to save a quarterly result, only to hurt the
next few quarters. With the alternative being three mediocre quarters with no
rewards, in some incentive system it's better to artificially pump up one
quarter and tank the next two quarters.

If stock options vested over a period of, say, 20 years, I wonder how the
actions of CEOs would change? I'm not sure, but I think, on average, they
would be vastly different than they are today.

I'm reminded of an article about Costco, where the CEO (who is an unusual type
of CEO) said that Wall Street was clamoring for him to raise his profit
margins and reduce the pay of his employees. He thought that this strategy
would definitely raise revenues in the short term and destroy the company in
the long term, by opening up an opportunity for a competitor.

~~~
davidw
Was it freakonomics, or elsewhere, where they mention the anthropologist who
paid a flat rate for bone fragments? Apparently, the natives were pretty
smart, so they took whole bones and smashed them to little bits, to get more
money. Oops!

------
bokonist
I don't know why anyone would invest in a fund that does not have the managers
keep a large portion of their own net worth tied up in the fund. There is a
huge information asymmetry. The investor does not know if the fund performs
well because the manager is brilliant, or if it's because the risk profile is
far worse than advertised.

