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The Perverse Incentives of Modern Management and Remuneration

How the structure of executives pay packages incentivises behaviour that is ultimately damaging the UK economy.

In this paper, leading City economist Andrew Smithers argues that the way senior management are paid seriously damages the economy and that shareholders appear to have received no benefit from the massive rise in the pay of senior executives.

Whether the major part of senior executives' remuneration comes from bonuses or options, the incentive effect is very similar and the metrics of success by which they are judged are share price, earnings per share, or total shareholder returns. This system has encouraged executives to take more risks than before by cutting costs and holding investment in innovation or productivity down, in order to bolster short-term profits and the company share price, to the serious detriment of the overall economy.

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Posted on 10 March 2015

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