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Incentive Orientation: Things Need to Change

What methods can successfully grow an organization if the leaders of the entity are gaming the system for personal benefit? Before stock options became popular in the 1980s, executives focused on corporate perquisites, a nice salary, and respect among peers and coworkers. Things were simpler and more predictable in the past. In our newer economy, time in the job has shortened and the rules of engagement are different. Most of an executive's compensation and wealth creation now comes from stock appreciation. Thus management has incentive to push the stock price higher, even for just a little while.30 However, management becomes dependent on the marketplace to recognize value in their collective efforts. If the entire market drifts down, or their efforts are not recognized as valuable, then no matter how hard they work, their large rewards will not be recognized.

Considerable time and attention are placed on the company's stock price. Management is under great pressure to push the price higher. Yet management does not have much time. Thus, it has become the norm in many cases for management to expend great efforts to boost the price up quickly. Mergers, divestitures, refinancings, equity carve-outs, venture funds, extensive layoffs and cost-cutting, strategic alliances, and so forth, are all considered for the sake of expanding corporate revenues and profits. The status quo is not an attractive option, nor is slow growth.

As discussed in Chapter 5, the best growth comes about through strategic expansion and organic growth. Growth through acquisition does not contribute to good stock performance though growth through organic means (i.e., internal expansion) contributes to strong stock performance. It may take longer and may not push revenues soaring as quickly as acquired growth, but it has a stronger impact on the stock price in the long term.

More of the incentive structure should be focused on creating organic growth rather than growth through acquired means. Compensation mechanisms in many firms have become short-term-oriented with managers being concerned about immediate shareholder gratification. Organizations need to do a better job of tracking performance based on the value added by key talent.

During the 1990s, corporate behavior entered a new arena that has since become scrutinized and criticized. The markets are now ready for a change in corporate compensation. Shareholders, regulators, government officials, and employees are demanding change now. Executives at major organizations are now being more heavily scrutinized in regard to their compensation. Board members are being more closely monitored too.

In Chapter 7 you consider modifications to the existing incentive structure. The changes are not meant for the entire organization, but rather, a small element that can be affiliated with the parent. If successful, the approach might become influential on the parent, but changing the culture of the parent is an extraordinarily complex task beyond the scope of this text. Furthermore, much of the discussion in this chapter focused on the behavior of senior management. As you explore in the next chapter it is unfair to place the burden solely on the shoulders of senior management and their advisors. In the past 20 to 30 years, middle management has been the cause of some large-organization decay as well. In the next chapter you look at how large organizations might be better able to utilize their human capital in the middle. Then, in subsequent chapters you consider modifications to existing compensation structures in which all employees might be able to work together to help create long-term value for their stakeholders.

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