Does short-term management pay?

Natalie Mizik and Robert Jacobson wrote an article entitled, The cost of myopic management for the July/August edition of the Harvard Business Review in which they explored the costs paid by the organization (and ultimately investors) when they become too focused on short-term revenue targets and begin inflating their earning by cutting expenditures. During their study executives would cut discretionary spending, which often included R&D, in favor of more impressive looking earnings. Mizik & Jacobson tracked over 400 companies and found that those firms that practiced “myopic management” would often have very impressive returns in the short-term, but long-term performed miserably. In order to begin to correct this behavior, firms need to begin to penalize executives for losses, not just reward them for gains. In addition, a portion of their compensation package should be tied to tenure, long-term growth and brand strength. Once an executive’s compensation is tied to long-term goals and objectives the myopic behavior will change as well.

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5 Comments

Filed under CEO, CEO Pay, CEO Salary, Executive Pay, Harvard Business Review, Leadership, Management, Natalie Mizik, Robert Jacobson

5 responses to “Does short-term management pay?

  1. Guess what? Your blog is amazing! I can’t remember when was the last time i’ve overcome such a good blog that almost all articles/posts were interesting and wouldn’t regret spending my time reading it. I hope you will keep up the great work you are doing here and i can enjoy my everyday read at your blog.

  2. CJ

    Thank you very much for your comment. Work, school and life have kept me very busy and I haven’t been able to post much lately. Thankfully school is almost over… so I expect to get back to this very soon.

  3. pzau

    Wonderful article. I am doing my phd in marketing and do a lot of such analyses.
    I do have two questions..
    1. What is SEO? Is it the Search Engine Optimization? Or is it some other marketing jargon. 🙂
    2. I dont know if I agree completely with the fact that long term goals are always better for teh firm. I do agree that for the firm, it is certainly better. But for a marketer in the firm? I cant answer that with no ambiguity.
    In a recent CMO council study, it was found that the avg lifetime of a CMO (chief marketing officer) was just 24 months! According to existent marketing literature, one of the biggest reasons for this is that marketing investments are not quite well-tied to profits or shareholder value.

    Therefore, in the marketers perspective, dont you think that a short term gain is more critical than a long term one? I would be writing on this on my blog in a little while…(just gathering info now)

  4. CJ

    Hello Pzau,

    Thank you for the comment and congratulations on working towards your PhD. I have considered that as well, but have not yet taken the leap.

    While I don’t recall using SEO in one of my posts – it is possible though – it is most often used to refer to Search Engine Optimization.

    Your second question is very interesting. While I did not see that particular CMO council study, I would agree that the average lifespan of C-level executives, in general, has declined steadily. Clearly there needs to be a balancing act performed between one’s self-interest (short-term wins that enable you to keep your job) and doing what is in the best long-term interests of the organization.

    It would not be hard to make the argument that, in today’s climate, one has to bank enough show short term successes in order to create enough goodwill to make decisions that may not pay off for months or years.

    I also agree that marketing investments are rarely expressly tied to profits or shareholder value. While marketing is since as an enormous cost center, I would argue that many executives do not fully appreciate the role that the marketing organization plays. Like any department, marketing expenses should be monitored particularly in a recession. However, organizations that continue to make investments in their products, business development, brand, etc tend to reap those rewards following an economic downturn. And each of those investments, depending on your market, does not pay off immediately.

    Ultimately, I believe that a marketer must demonstrate short term value (for job security), but also must help lead the organization in setting the strategic (long term) priorities. It is much too easy to solely focus on what needs to be done this month or this quarter, it is much more difficult to make the decisions that will enable the organizations to be successful 2 – 5 years from now. The challenge is to be able to do both.

    Thank you very much for your questions and good luck with your studies.

  5. CJ

    One correction, SEO was used by the authors to designate those firms that used short-term expense reduction in order to inflate revenue.

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