Bonus payments for managers inhibit investment
Because bonuses are linked to short-term profits, they discourage investments that pay off in the long run. As a result, productivity falls. This has an impact on the economic performance of an entire country, as researchers have now shown for the first time. They argue in favor of compensating managers with equity. The EPoS Economic Research Centre at the Universities of Bonn and Mannheim has published these findings in the discussion paper “Capital (Mis)allocation, Incentives and Productivity“.
“Bonus payments give managers a share in short-term company profits, which is why they often neglect long-term investments,” says Matthias Meier, Junior Professor of Economics at the University of Mannheim and working at the EPoS Economic Research Center. “Compensating executives instead with equity options has the advantage that their value increases if the company generates higher profits in the long run. In our view, this is a better way to promote economic performance. They encourage much-needed investments and contribute to overall productivity.
About the study
In their empirical study, the researchers analyze the impact of new accounting regulations in the USA from 2005 on the compensation of managers and their investment decisions. They study a total of 725 listed companies from various industries between 2000 and 2014.
You can find the complete study here.