The Bonus Culture Has Raised the Hurdle Rate

The rise in the hurdle rate shows a change in management behaviour caused by the preceding change in incentives. Following a dramatic rise in US CEOs’ salaries and bonuses in the decade to 2000 there have been no significant changes since. This change in incentives had the usual effect, with a natural time lag, of changing behaviour. The benefits for management that come from improving short-term profits have risen sharply compared with the longer-term benefits from corporate investment, which are unchanged. This has discouraged investment in a similar way to a rise in the hurdle rate on equity. These incentives are much stronger for quoted than unquoted companies and it is for the former that the weakness of investment has been most marked. This provides additional evidence of the bad impact on the economy that has been caused by modern management pay systems.