Executive Compensation

The studies continue to roll in proving a simple point; compensation incentives matter.  We now know that executives paid bonuses on earnings per share will manipulate balance sheets as well as income statements to increase earnings per share. [A shock to Morgenson of the NYTs.]  One trick of many; share buybacks.  Buy firm shares, increase earnings per share.  Firms that pay on earnings per share have more buybacks than firms that do not.  Many buybacks do not increase firm health or shareholder value and may decrease it (if the price is too low).  At some point boards will use more neutral measures (bonuses or options that depend on firm performance measured against an industry index) and be alert to actions that increase paper numbers in order to maximize compensation given whatever measure is used.