Steady earning growth - the senior managers carrot and stick!

Some companies’ senior management will be manically focused on steady earnings growth.  Most senior managers of large public companies are compensated in some sort of relationship and manner connected to the stock price of the company.  Seems like a smart incentive for the shareholders to support – the higher the share price, the higher the return on their investment in the stock.  But this drives short-term behavior as they live in constant fear of the stock price falling.

The problem with the stock price falling is both real and perceptual.  For instance, if you’re the CEO of Apple and your stock price falls 1% based on some sort of bad news about the cost of your new display being leaked to the press, that equates to a market value loss of $7.5 billion – yes, that’s BILLION – at the time of this writing.  So you can see the REAL PROBLEM and thus the intense interest in keeping the value moving north on the charts as it materially affects the company’s value, and very importantly, the value of the stock options granted to the CEO (and his staff) in lieu of salary.

The perceptual problem is also very important.  Any drop in the stock value causes investors – and here I am referring to mega-funds – to make phone calls and texts to the CEO.  While the CEO is concerned with running the company and trying to contain the media leak about the new display that caused this 1% drop, he/she is instead consumed with irate investors who are demanding answers to their very precipitous drop in market value of the stock investment in Apple.