The introduction of share option schemes, whereby managers and workers are encouraged to obtain shares on preferential terms, blurs the divide between owners and managers and goes some way to ensure that the interests of management and owners are common (see the mini case, ‘Share options for company directors and workers’). Nevertheless, the rewards to managers do not derive predominantly from their position as shareholders and the possible conflict between shareholder and management remains
Directly linking managerial rewards to profit performance can induce management to work in the interest of shareholders. However, as indicated above, this may be only one determinant of managerial pay.Management might also seek to link its rewards to other performance measures such as company size and the growth of sales, although in certain circumstances these measures might not affect or might even conflict with profit and/or company efficiency. For example, sales might increase as a result of an overly expensive and inefficient promotional campaign; a gas company’s sales will rise with lower than average winter temperatures; or the company might benefit from the demise or mistakes of rivals. Finally, although merger and takeover activity often provides a rationale for increased managerial salaries, it is often found that such activity does not in itself improve overall profitability. Such activity is, however, consistent with managerial motives for higher status
The performance of a firm’s managers affects their promotion prospects both within and outside the company.When seeking promotion, management will therefore wish to be associated with success, as measured by their individual or company performance. Association with failure and/or poorly perceived market performance will lower a manager’s future potential earnings. Therefore, a competitive market for managers, where their value is based upon the profitability and performance of their firm, might help ensure management works in the interest of shareholders. However, the question now arises as to the efficiency and competitiveness of such markets. A major problem is a lack of real information. For example, individual management performance might be difficult to identify and a ‘poor’ manager could be ‘carried’ by more efficient colleagues or subordinates, and vice versa.Where managers frequently change positions, the long- and medium-term impact of their performance might also not be immediately available. Further, even if performance data are available, this does not in itself guarantee an efficient market, as promotion may be gained on the basis of patronage or some other criterion. Nevertheless, the market still provides a ‘control mechanism’. We may now consider the influence of the product market