Edward Hadas

Don’t bother with share-based pay

Edward Hadas
Apr 16, 2014 12:13 UTC

Coca-Cola’s plan to give generous awards of shares to executives has angered some of its shareholders. They have good reason to complain about the potential transfer of about 15 percent of the company to the top 1 percent of its staff. But Coke is only pushing the already bad idea of share-based pay to a foolish extreme.

The justification for paying workers in their employer’s paper is simple and superficially appealing. Worker-owners might be more motivated to push for higher profit than if they just received salaries, even salaries which have bonuses in the millions tied to company performance.

The argument relies on a narrow view of corporate purpose: the sole goal is to maximise the share price, that is, the present value of future profit. Even if that doubtful assertion is accepted, the connection between an individual worker’s contribution and the movement of the share price is too weak for stock awards to motivate behaviour.

In fact, it’s worse than that. Changes in the share price have little to do with actual improvement or setbacks to corporate prospects at all. Financial theory says otherwise. It relies on a claim that the current share price is always the best available estimate of value. The messy reality is different. Economics Nobel laureate Robert Shiller identified one problem in 1999, saying “prices change in substantial measure because the investing public en masse capriciously changes its mind.” The subsequent gyrations of stock markets have demonstrated that financial conditions also have a great influence on share prices.

Over the decades, all investors’ psychological errors might be corrected and all monetary forces could cancel each other out. But shareholding workers may well have to wait a half-century or so before they can be confident that the stock market will justly reward them for their company’s economic performance. Most of the employees concerned will have retired or died by the time the stock and economic returns have been well aligned. In the interim, the price will reflect many things, with corporate success quite a way down the list.

Elop and the neo-feudal revolution

Edward Hadas
Oct 2, 2013 15:17 UTC

I have nothing against Stephen Elop. The former and future Microsoft executive seems to have done a pretty good job running Nokia. It’s a little awkward that he was offered $7.3 million to move from Microsoft to the Finnish phone-maker and stands to receive $25.4 million to rejoin the his former employer. But the tech industry often has a slightly incestuous feeling, and there were plausible strategic arguments for both moves. Elop did what almost any senior American executive would have done – negotiated and renegotiated favourable contracts.

However, Elop’s packages are part of an outrageous system of executive remuneration. It features pointlessly complex arrangements – base salary, cash bonus, a small collection of share plans plus substantial payments for coming and going. The deals are rigged in the executive’s favour; Elop obtained highly attractive last minute alterations just before the sale of the phone business. And the numbers are all unjustly large, by any relevant standard.

The announcement of Elop’s terms was understandably met with widespread disgust. The same response is typical whenever executive pay comes up.