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Posted on June 8, 2013 at 4:46 PM

I recently had my attention called to a great post on the WSJ.com blog by Henry Mintzberg, a professor of management at McGill University in Montreal. Though it’s the opposite of the sort of advice one would expect to get from the Wall Street Journal, it was apparently first posted in 2009 and then re-upped in November, 2012:

I’m no economist nor management or business guru, so I have no idea how widely shared are Prof. Mintzberg’s views. I recount them here in some detail first, because they make a lot of sense, and second, because they expose many of the flaws of economism in the form that it takes in actual practice (which is quite distinct from economism as theory, which has its own set of problems).

Mintzberg starts off noting that many are recommending changes to the system of paying bonuses to top corporate execs. This, he says, is a waste of time; it is far better just to eliminate all such bonuses. The system, he argues, is not fixable. He goes on to call it like it is: Executive bonuses—especially in the form of stock and option grants—represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy.” Note the key word corruption—we are far too ready to attribute corruption to banana republics and to ignore corporate behavior in the U.S. that fits that description.

Mintzberg next explains what sorts of incentives bonuses provide for executives. Instead of real corporate leadership, they tend to act like gamblers—which is easy because these bonuses allow them to gamble with other people’s money and with all the rules rigged in their favor. When the stock price of the company goes up in the short run, they win—which is, as Mintzberg comments, a good incentive to “make sure to have your best cards on the table, while you keep the rest hidden in your hand.” And if, despite all the rules in your favor, you still lose, then you quit, and you get to cash in your golden parachute. As Mintzberg summarizes, “Who, playing such games, wouldn’t take substantial risks? What’s to lose? If more executives these days were as creative in doing their jobs as they are in getting compensated for them, we would be in a period of boom, not bust.”

Still, optimists insist that if they just tinkered around the edges, they could fix exec bonuses so that they rewarded the right behavior and then everything would be great. Mintzberg goes on to say, no way, because that way of thinking is based on three big myths:

·        A company’s overall health is represented accurately by its financials, especially by the current stock price.

·        Performance measures, if suitably calibrated for the long term, show the company’s real strength and so could be used to set executive pay.

·        It’s primarily a few guys at the top, today, who are responsible for a company’s performance.

Mintzberg says all these ideas are crazy. He seems to believe in some old-fashioned ideas—like for example that a company’s true strength might lie in its goodwill and its reputation, which in turn might be based on something like (gasp) the quality of its products and services. And stop giving all the credit to the CEO as if he’s some sort of god. If the company does well three years from now, it may be that the CEO was a whiz, or that the old CEO made some good moves that are just now starting to kick in, or that the line workers are doing a great job and the CEO is clueless, or any number of other things.

The very idea that the CEO is such a big deal is part of what today undermines the modern corporation: “Put differently, executive compensation these days reinforces a class structure within the enterprise that is antithetical to its effective functioning. Because of its symbolic nature, executive compensation as currently practiced sends out the worst possible signal to everyone in the enterprise.”

So what are bonuses good for? Mintzberg concludes that the only thing they do is weed out the people you don’twant to be the CEO, if they demand a bonus: At the worst, you get a self-centered narcissist. At the best, you get someone who is willing to be singled out from everyone else by virtue of the compensation plan. Is this any way to build community within an enterprise, even to foster the very sense of enterprise that is so fundamental to economic strength?

“Accordingly, executive bonuses provide the perfect tool to screen candidates for the CEO job. Anyone who insists on them should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise.”

If the end result is that a lot of the folks now being considered for CEO jobs are weeded out, that’s a good thing, says Mintzberg. Much better we get rid of those yo-yos and find a new generation of corporate leaders who actually care about the corporation and its success: All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit.”

And that, I believe, is a pretty good working definition of corruption.

I appreciate Mintzberg’s statement that this business of paying big bonuses to CEOs is not about “markets” at all—yet corporate apologists keep on saying that you have to pay these bonuses because it’s what the market demands. This is how economism, when people actually try to put its incoherent and illogical ideas into practice, ends up breaking down. The market is invoked as a shibboleth for all sorts of cronyism and corruption that is all about the privilege of those in power and has nothing to do with any semblance of “free” markets.

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