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The New Productivity Gamble

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Tuesday, August 11, 2020 / 05:18 AM / By Proshare Research / Header Image Credit: EcoGraphics

There has been an uptick in public concern over the nexus between executive and productivity, analysts have found it increasingly difficult to pair C-suite bonuses with executive value-addition. Behavioural economists contend that paying CEOs and other corporate executive's large bonuses to increase productivity may not necessarily bring the bacon home, as the link between bonuses and white-collar productivity is at best tenuous. Indeed a few corporate analysts have argued that large bonuses simply increase operating costs.

Economist Dan Ariely as noted earlier has observed that paying people high bonuses can result in high performance when it comes to simple physical tasks, but the opposite could prove true when people are required to use their brains-which is usually what companies try to do when they pay executives very high bonuses. According to Ariely, if CEOs were paid to lay bricks, motivating them through high bonuses would make sense. But people who receive bonus-based incentives for thinking about mergers and acquisitions or coming up with complicated financial instruments could be far less effective than people tend to think and there may even be negative consequences to large executive pay-outs.

The questions that arise in response to Ariely's argument include the following;

What then should determine CEO bonuses?
Don't CEOs deserve bonuses like other staff?

To give context to Ariely's argument, he did not call for a scrapping of executive bonuses, but he did note that the main concern with such bonuses were questions arising from the ability of bonuses to increase productivity, the returns on corporate equity and how appropriately compensated were lower to middle-level staffers.

Business Mogul, Warren Buffet asserted that he is unlikely to invest in a firm with low returns on equity and below-par staff pay. The question that still arises is, what should determine executive bonuses? The answer is difficult to decide but what is becoming clearer is that bonuses should not be paid in anticipation or as an incentive for bringing out the best performances from executives, instead bonuses should be paid as a reward for performances that have already been achieved. Such bonuses can then be justified if the CEO overtime increases shareholder's value or return on equity (RoE).

The Boston Consulting Group's (BCG's) Growth-Share Matrix provides some insight into the context of value creation of several listed local companies and their executive's pay. For the Oil & Gas companies, for example, the real growth rate is low and the share of the market wallet for upstream and downstream activities is modest for both Seplat and Oando, this means cash flows are neutral, earnings unstable and corporate strategy is generic which means that prospects for overall corporate stability are borderline. Companies in the Telecommunications sector have seen high real growth rate in both voice and data revenues and their market share are also relatively high meaning that a company like MTNN has seen high and stable earnings, neutral cash flow, and growth-oriented capital expenditure. The increase in growth and significant market share explains why MTNN's CEO can comfortably pull the highest remuneration of all CEOs with companies listed on the NSE.