One of the most ubiquitous threats to the sustainability of any business is short-term management – that is, when incentive programs only provide short-term motivation. This dilemma came to the spotlight during the 2008 financial crisis, when it became evident that managers were making risky bets for short-term profitability, but oblivious to the long-run implications of their decisions. Since then, much emphasis has been placed on reforming the existing corporate incentives of profit-sharing plans, bonuses, and piece-rate pay plans. The task that lies ahead for future managers involves taking a new approach to motivating not only employees, but also managers , and also, realizing the dangers in purely extrinsic incentives.

In my opinion, the root cause of short-term management is a lack of diligence that stems from an absence of ownership; because executives in many cases possess little or no equity in a company, they don’t always feel obligated to postulate the long horizon of their decisions. As Lucien Bebchuk argues in his blog, there was a “partial insulation of executives’ payoffs from effects on long-term shareholder value“. I ultimately agree, and believe an alternative to countering this problem is to make employee stock ownership plans (ESOP) more prevalent in organizational culture. With ESOP’s, employees will actually possess stock equity in their company, thus compelling them to consider the long-term implications of their decisions. If a strong sense of psychological ownership is felt among employees, the organization will benefit from a stronger foundation of commitment.

Another solution I believe would be to focus more attention to improving intrinsic motivation, not only among employees, but also among managers. With only the extrinsic motivation of money, there is a disconnect between managers and the soul of the organization. By applying expectancy theory, one can infer that extrinsic incentives are only considered in the short-run, and are not sustainable – in other words, money can’t motivate you to do something you don’t like forever. Instituting incentive plans that reinforce good behaviour and, recognize and involve employees with the company in more profound ways can inculcate an emotional attachment among employees to the company.

The bottom line is that people constitute organizations; fostering a long-term intrinsic connection to an organization is vital to growth and sustainability.

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Sources:

Silverthrone, S. (2012, April 11). The High Risks of Short-Term Management. Retrieved from Harvard Business School website: http://hbswk.hbs.edu/item/the-high-risks-of-short-term-management

Manitoba Islamic Association. (2016). Financial Sustainability [Photograph]. Retrieved from Photo: http://www.miaonline.org/financial-sustainability/

Percival, M. (2016). Finance Sector [Photograph]. Retrieved from https://www.cartoonstock.com/directory/f/finance_sector.asp

Blog Cited: http://blogs.worldbank.org/allaboutfinance/executive-pay-and-the-financial-crisis