Compensation systems in practice

Dear all,

Here are two postings from Facebook written by Hermann Stern (a member of this forum) and my replies to them.
To those interested in how to redesign compensation systems, this might be insightful - I am looking forward to a lively discussion!
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Hermann J. Stern This is the most convincing piece I have ever read against share option plans for managers
FT.com / Comment / Opinion - Managers must be judged on the real score
http://www.facebook.com/ext/share.php?sid=108909115589&h=sM3xt&u=NJyk2&r...

Niels Pflaeging replied:
Good article about Shareholder Value stupidity, indeed. But the points made here are not new. And the advice given at the end is simply WRONG. He writes: "Executive compensation should be based entirely on real-market measures such as revenue growth, market share, profits and book equity return.". But Revenue Growth and Market Share are equally BAD... Leia mais measures to link with compensation as Share price! Think about it. Those two measures are not connected to real RESULTS, so they motivate, again, the wrong behavior (forcing growth and risk, inflating sales, worsening results for sales, manipulation of figures etc)! "Profits" are a good measure and "Return" is equally ok, I would say, if NOT used as absolute figures but in % over sales and judged against market!
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Hermann J. Stern This is really good. But a lot of people hate it according to the letters to the editor. Jamie Whyte shows quite smart how no management compensation plan can ever prevent a crises. I believe his is right to the point.
FT.com / Comment / Opinion - Brown is wrong to target bankers’ bonuses
http://www.facebook.com/ext/share.php?sid=104780824103&h=R-3B2&u=iOjsP&r...

Niels Pflaeging replied:
Jamie Whyte then apparently tries to prove something irrelevant, I think. The point is not if management compensation systems can PREVENT a crisis. But at least they shouldnt STIMULATE it (which they evidently did in the last crises). The crises was not CAUSED by a lack of regulation etc., but by active STIMULOUS in organizations to grow, to meet ... Leia maistargets, etc. The point with compensation thus is that these systems should be designed not to give INCENTIVE, and not to MOTIVATE or control behavior. THAT is totally feasible. Compensation that motivates behavior (carrot-and-stick approach) will inevitably stimulate unethical behavior in organizations. It´s a pity that the problem is not being recognized, even now.

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Regards,
Niels