The recent crisis in Wall-street created a hefty discussion regarding the compensation senior mangers received. What I get by reading a little of this discussion, is that there is a general line of thought according to which the problem was the lack of connection between the long term success of the company and the compensations of senior managers.
Today I read this article in Knowledge@Wharton site about the difference between public and private company managers. This got me thinking that the problem might not be that the compensations of managers was not connected to long term, but that the demands investors and analysts had from public companies themselves were short terms. The compensations senior managers got were in line with the demands of the investors of the company. They should be.
Most of the analysis you see in the stock market is short term. It always surprises me that when a company publishes good reports the stock price rises. The question should not be the current reports, but the reports of three to five years ahead. This in turn percolates into the boards of directors. If the board, which is supposed stand for the investors, if focused on the short term, than this is what the senior managers will do. Focusing on the bottom line is important, but you should not focus on the bottom line of your next report, but on the bottom line of the report you will publish in three years.
This is a cultural and managerial problem. We focus too much on the short term. This is why companies don’t invest as much as they should in human resources and training. You can only see results for this kind of investments if you wait for a very long time. So, the investors can point fingers to the senior managers for their large compensations, but until they change their focus to the long run and enforce this kind of thinking on their directors, there will be no change.