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Wednesday, September 06, 2020

Is the Jingle in Your Pocket Worth the Jangle in Your Head?

Many of the basic causes of today’s epidemic of overwork come from the overweening expectations of financial markets. The capital investment necessary for business is almost wholly controlled by huge financial institutions such as global banks and investment houses, themselves businesses with shareholders trained to expect continually growing returns. Very little of those returns come from dividends. Indeed, many businesses, especially in high-tech fields, pay no dividends at all. The high returns that Wall Street and its equivalents around the world crave are produced by rising stock prices and the buying and selling of stocks, derivatives, and even less comprehensible financial instruments. And whereas benefiting from dividends is a long-term activity, relying on a steady income stream, trading is an essentially short-term business. You take your profits as soon as you think a peak has been reached, and before the inevitable slide in prices follows.

“The solution was to base as much as possible of the incomes of those at the top of an organization on upward movements in the share price.”
Shareholders and managers have an uneasy relationship. Shareholders want as much return as possible, which means keeping salaries down. Managers want to take their own profit from the work they put into running the enterprise. I don’t know who invented what must have seemed a sure-fire way to keep both sides happy, but I’m going to guess he or she was looking to earn a mint of money as a result. The solution was to base as much as possible of the incomes of those at the top of an organization on upward movements in the share price, whether by paying direct bonuses or awarding stock options. At one stroke, the interests of shareholders and managers were perfectly aligned. Pay top executives to drive up the share price, so the shareholders can trade the shares at a greater profit.

Fluctuations in share prices are short-term phenomena, and most are driven by the profits reported on a quarterly or semi-annual cycle. The immediate result of our unknown genius’s brainwave to link executive pay to share-price movement was to fix every executive’s gaze on one place: the next quarter’s profit figures. Falling profits now signal cuts in executive earnings (or, since employment negotiations tend to ignore the downside, at least a standstill), something no one views with ease. Worse still, in the tightly-knit world of boardroom members, “missing the numbers” represents a loss of face for all those involved. It must have seemed that the plan was working beautifully.

“In the crazy logic of Wall Street, meeting your objectives is seen as no more than you are paid for.”
Then the law of unintended consequences stepped in. At least two consequences seem to have been missed. First, in the crazy logic of Wall Street, meeting your objectives is seen as no more than you are paid for. It may (sometimes) stop the share price from falling, or limit its decline, but it is no reason to drive it up. To do that you must exceed no only your own estimates, but also the expectations of a legion of analysts, whose thinking is based on who knows what calculations. And since this year’s or this quarter’s results are old hat the minute they are announced, whatever you do achieve must be exceeded again on the next cycle. It is an accelerating treadmill no one can get off.

“Many of today’s leaders are overstretched, overburdened, and overly concerned with the demands of the financial markets and stockholders’ insistence on immediate gratification.”
The second unforeseen consequence of a myopic focus on quarterly numbers is simple: meeting or exceeding them becomes worth any sacrifice, given the alternatives. CEOs nowadays last barely 2 years in office on average, even if some manage to leave with generous “golden parachutes”. Most of todays’ top executives work harder than rich people have ever worked in the past. However, it takes far more than their own efforts to keep ahead of the relentless demand from Wall Street for more productivity and higher profits: it means forcing everyone else to work just as hard, or preferably even harder, than they do. And since people must continue to produce more at less cost, that means driving up output without increasing wages, salaries, and benefits.

Many of today’s leaders are overstretched, overburdened, and overly concerned with the demands of the financial markets and stockholders’ insistence on immediate gratification. The result is leadership that is short-term and based on instant responses: habitual or automatic reactions, emotional responses, instant judgments, and quick-fix solutions that ignore or avoid the real issues. When you are going flat out, you have few alternatives and no time to find any more.

It’s time to call a halt. The essential first step in changing course comes from a shift in attitude and viewpoint: in this case, a move away from the current obsession with short-term results and immediate returns towards a long-term understanding of what makes for organizational longevity and a worthwhile working life. Unless this happens, the treadmill is only going to run faster.

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