Wednesday, September 15, 2004

Executive Compensation and the Bills loss, What do they have in common?

What a tough loss for the Buffalo Bills this week. The key play was a 45 yard pass from Brian Leftwich to Jimmy Smith on 4th and 14 for the Jacquars. Had the ball dropped incomplete, the Bills could have run out the clock and gone home with a win.

But no, the pass was caught and the Bills ended up losing the game on the last play of the game (a walk-off touch down).

At the time I thought, "ARGH!! There goes Clements trying to pat his stats again."

So what in the world does this have to do with Finance? A lot actually.

As Gregg Easterbrook (who very well may be my favorite web author of all) wrote in his Tuesday Morning QB piece (warning it is HIGHLY addictive!), Clements is in the last year of his contract. Since cornerbacks are rewarded (either in a new contract or in bonuses) for interceptions, going for an interception rather than merely knocking the pass down may have been contract driven.

This is really just a compensation issue in disguise. Pay matters. How we pay people matters even more. For example: Does the way we reward division managers lead to competition between divisions? Or imagine a CEO who is paid for making his/her firm large. Even though not growing it might be better for shareholders.

Is this that much different than a CB padding his stats because he will be rewarded with a higher contract even though batting down the ball would have helped the team more?

Lesson? BE very careful how you pay people, it may lead to unintended consequences. Which very well may have been the cause of many firms' troubles during the so-called corporate governance crisis. (Example Enron etc)

Thanks to Mark Peterson for bringing this story to my attention (via story link from the SportsEconomist Blog . I will definitely be adding it to my reading list!!!)

No comments: