The front page of leading newspapers reported the sudden resignation of a top business executive. The reason behind his resignation was not clear and only occupied a couple of lines. More emphasis was on this person's high compensation, from present and past employers. I was stumped !
Curios to find why this person was paid so much, I searched specifically for achievements, skills, talent and omitted words and phrases related to compensation, salary, bonus. I could not find anything exceptional to justify that kind of compensation.
The law of distribution is one of the ancient. After a successful hunt, people would gather around the dead animal and only one person, usually the oldest, would be given the task to distribute. The person responsible for distribution could not set aside anything beforehand and would claim only what was left-over. Such laws are the foundations of human society.
The hefty compensation paid to a handful people in any corporate is mostly in the form of stock options (ESOP) or common stocks those can be redeemed after a certain period. Generally, ESOP is as follows - e.g. the executive gets the right to buy, say 100k shares at a future date at a pre-determined price. Suppose that price is 100; if the price goes up to 120 on that date, the person can still buy at 100 and immediately sell it in open market at 120 netting a profit. Or they can wait for the price to rise further.
This is a good arrangement as long as people are honest. If otherwise, it becomes a dangerous one.
These handful people are the ones who are directly responsible for the financial management of the company. One can increase revenue via aggressive sales though it may actually not generate enough profit for sustenance, or another company can be acquired and merged to increase the revenue which may turn out to be a bad acquisition, or they can evade tax liability, or simply lie. There are several ways to create a sense of optimism whereas the underlying reality may be different. Also, the promoter group wants to limit the financial information only to a selected few for vested interest. Most promoters and their close ally are the ones to flee the scene at the first hint of trouble. And they run away being richer at the cost of the hard earned public money.
ESOPs should be distributed entirely to employees except for those handful ones.
Employees who are more closely involved in building the products & services of the company and directly serving the customer and far away from the financial management of the company. This will improve their loyalty to the company and hence they will work for the long term. It will also improve the quality of work as their work directly affects the future compensation. I also think it will improve the financial discipline of the company and curb the indifferent attitudes employees have towards company facility like going for business class in a one hour flight or binge drinking on 5-star accommodation or using the photo-copier for personal use :-)
This simple change of incentives can go a long way in improving corporate efficiency and lead to more ethically managed business. Insider trading will be a lost phrase because no one will hold those obscene number of options and be in a vantage to manipulate the stock price. People can engage in more meaningful work than fixing the broken system left by dishonest ones.
Curios to find why this person was paid so much, I searched specifically for achievements, skills, talent and omitted words and phrases related to compensation, salary, bonus. I could not find anything exceptional to justify that kind of compensation.
The law of distribution is one of the ancient. After a successful hunt, people would gather around the dead animal and only one person, usually the oldest, would be given the task to distribute. The person responsible for distribution could not set aside anything beforehand and would claim only what was left-over. Such laws are the foundations of human society.
The hefty compensation paid to a handful people in any corporate is mostly in the form of stock options (ESOP) or common stocks those can be redeemed after a certain period. Generally, ESOP is as follows - e.g. the executive gets the right to buy, say 100k shares at a future date at a pre-determined price. Suppose that price is 100; if the price goes up to 120 on that date, the person can still buy at 100 and immediately sell it in open market at 120 netting a profit. Or they can wait for the price to rise further.
This is a good arrangement as long as people are honest. If otherwise, it becomes a dangerous one.
These handful people are the ones who are directly responsible for the financial management of the company. One can increase revenue via aggressive sales though it may actually not generate enough profit for sustenance, or another company can be acquired and merged to increase the revenue which may turn out to be a bad acquisition, or they can evade tax liability, or simply lie. There are several ways to create a sense of optimism whereas the underlying reality may be different. Also, the promoter group wants to limit the financial information only to a selected few for vested interest. Most promoters and their close ally are the ones to flee the scene at the first hint of trouble. And they run away being richer at the cost of the hard earned public money.
ESOPs should be distributed entirely to employees except for those handful ones.
Employees who are more closely involved in building the products & services of the company and directly serving the customer and far away from the financial management of the company. This will improve their loyalty to the company and hence they will work for the long term. It will also improve the quality of work as their work directly affects the future compensation. I also think it will improve the financial discipline of the company and curb the indifferent attitudes employees have towards company facility like going for business class in a one hour flight or binge drinking on 5-star accommodation or using the photo-copier for personal use :-)
This simple change of incentives can go a long way in improving corporate efficiency and lead to more ethically managed business. Insider trading will be a lost phrase because no one will hold those obscene number of options and be in a vantage to manipulate the stock price. People can engage in more meaningful work than fixing the broken system left by dishonest ones.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.