CHAPTER 13 - REVIEW - Investment and Rewards Distribution

                        In this chapter we have reached the topic that most people believe represents the practical objectives of all management — profit and reward. What we have seen is that profit is not only an abstract and imprecise concept, but also its identification, and particularly its physical or virtual location can be manipulated easily. Although in narrow accountancy terms it may seem simple to define profit, experience shows us that even in the largest and most prestigious organisations its interpretation can become wildly distorted. The main reason is that we are trying to perform arithmetic on two completely different things. The value of cash and money in the bank is an unambiguous financial value. The ownership value of physical and intangible assets depends entirely on the human opinion and judgement of individuals and groups. The beliefs of people about the future value and intermediate flow of benefits are also embodied in the valuation of assets. Even if these opinions and judgements agree they may be completely wrong. In many cases there is no general agreement, since the opinions depend on the vested interests of the judges, and these may represent the conflicting objectives of different parties. In other words we are trying to add together apples, elephants, and miles per hour.

Rewards and penalties are concepts that are more difficult for us to understand than may appear at first sight. The important point for us to remember is that there are nearly always two sides to every process or relationship that can produce rewards and penalties. The reward of the early bird is to catch the early worm. The penalty of the early worm is to provide breakfast for the early bird. Similarly, there is no sound rational basis on which to allocate rewards. We have seen how easy it is to manipulate the allocation of profits. We can reduce costs such as workers’ wages in order to increase profits. We might also argue that by raising the rewards of chief executives we motivate them more highly and therefore increase profits. We have no clear evidence that there is any correlation between executives’ salaries or other rewards, and their performance. There have been many instances where executives responsible for abysmal or even catastrophic performances of their corporations have been given financial rewards worth more than the amount of money that could be earned by a conscientious worker in fifty years. In contrast we have had considerable evidence during the last century to suggest that workers are more efficient when given appropriate financial incentives and working conditions. We have nothing to suggest that workers improve their performance when we impose the penalty of cutting wages or any other benefits. Finally, we have explored simple elementary techniques for unambiguously displaying and analysing the distribution of rewards or penalties. This is a highly sensitive subject that most organisations actively seek to conceal from their employees and usually refuse to discuss.

Jack lives in a remote part of Ruritania and breeds geese that cost him 10 doubloons each to rear. Their meat is tough and their eggs are too hard to eat. Jack sells the geese for 20 doubloons each to Jill who visits him from the city far away. Jill returns with them to the city where the geese each lay 10 golden eggs before dying of air pollution and exhaustion. Jill sells the eggs for 100 doubloons each. How should the profit be shared?