The Fruits of Civilization (39) Investment


Growth is dependent upon investment. The American and British compensation system for corporate executives is geared against investment.

Executives are now paid largely in bonuses rather than salary. These bonuses are typically tied to the share price, which in turn depends on the ability of the company to meet its quarterly earnings-per-share target. Stock buybacks tend to boost earnings per share; investment plans may dent them. Hence, executives are incentivized to short-term profiteering that has negative long-term consequences, including declining productivity and decreased competitiveness.

The result of the increased importance of bonuses and the use of these measures of performance is that managements are now less inclined to take short-term risks, such as cutting profit margins, and more inclined to take the longer-term risks involved in lower investment and the possible loss of market share that will result from higher margins. ~ English economist Andrew Smithers