Reversing Perverse Incentives

Abstract

Depressed business investment prevents growth. There are two possible ways to change this. The first is to alter the way senior managers are remunerated. The second is leave the incentives unchanged but change their impact on investment. This chapter deals with the first. Bonus systems for companies could be changed by encouraging them to include productivity targets. Productivity is output divided by hours worked. Both these data are known to companies as output is broadly defined profits plus employment costs. Though known the information is seldom if ever published. The current failure to do so is both the result and the cause of misinformation, as analysts and financial journalists regularly confuse sales with output. The requirement to publish output and productivity data would on its own benefit the economy.