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Lessons Learned?

Poorly designed organizational compensation incentives are largely to blame for the problems experienced through much of the 1990s.26 Many of the individuals who were listed among Business Week's top paid executives were among our list of fastest revenue-growing firms during the same time period (or were involved in management impropriety). However, revenue growth (particularly growth gained through acquisition) did not lead to strong stockholder performance. Because acquired growth can accomplish an organizational overhaul very quickly, it is probably not surprising that this methodology has been subject to abuse. Ultimately, the shareholders lost, despite management's predictions that their organization might perform well with the acquired assets.27

Although acquired growth may not benefit shareholder wealth creation, it offers a path for senior management to create personal wealth. And, the bias toward creating deals may result, in part, from the short duration of CEO tenure. Given their relatively short stay at the top (i.e., three to four years), CEOs have great incentive to promote M&A activity or other transactions that will foster growth, facilitate a culture change, or manipulate a stock option harvest. Furthermore, given the large wealth transfer with M&A activity, many deals may also have been driven by pressures from investment bankers, venture capitalists, lawyers, and other financial advisors who would substantially gain from the harvest.

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