Pay Incentives

When pay incentives are not aligned with business longevity, this makes me nervous.  General Electric (GE) recently announced that Senior Vice Presidents will get 20% bonus if they hit both 1) structural cost and 2) operating profit targets.

Both these targets are misaligned.  This will drive two outcomes:

  1. There will be layoffs, decrease in business investment, decrease in travel.  Though these cuts are often necessary, these decisions decrease employee moral and should be done with care.  The moral is further diminished when employees find the cost cuts are implemented to increase the bonus of 15-30 people in the company.
  2. More importantly, the focus on operating profit will increase pressure to hit reporting targets.  If you have an understanding of accounting, you know operating profit is easy to manipulate even with SEC regulations.  The operating profit target may be reached, at the expense of earnings integrity.

Ultimately, I believe without solid cash performance, any company should be punished in it’s stock price.  Cost cuts will generate reported cash, but operating profit targets don’t have to.  I do not believe the  incentives put in place for GE Senior Vice Presidents will drive the right behavior or make the company more valuable for shareholders.

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