austin-murphy-the-triumph-of-evil

166 THE TRIUMPH OF EVIL
skills), there existed the agency problem of motivating non-owner managers
and workers to achieve organizational goals such as improving
efficiency (Jensen, 1986). In both East (Steudtner et al., 1988) and West
(Perridon and Steiner, 1988: 344-367) Germany, similar variables were
used to measure, motivate, and reward good performance. For instance,
actual revenue and profitability levels achieved were examined in both
countries, and special emphasis was placed in East as well as West
Germany on cost reductions (Kostensenkungen) and return on investment
(Rentabilitaet). In addition, in both countries, the performance
measures were compared to past performance, to competitors' performance,
and to targeted results. Actual performance above expectation
was often rewarded with bonuses and recognition, while sub-par performance
could result in demotion.
In East Germany, the ability to compensate managers for good performance
was limited by ideological directives that restricted differences
in pay (Hof, 1983). In addition, job security rules inhibited laying off
managers and workers fo r poor performance (Thuet, 1985). However,
similar limitations also existed in most companies in West Germany,
where the labor force is heavily unionized (including a large portion
of white-collar workers). Where incentive systems do exist in capitalist
firms, they are usually of a monetary form that can be manipulated
for personal gain to the detriment of business or society as a whole
(Schwartz, 1991). For instance, employees often have a greater incentive
to play office politics than perform productive work in capitalist
systems (Sherman, 1993). In addition, commission salespeople often
"push" overpriced, unnecessary, and poor quality products that frequently
have no positive value to the consumer (e.g., Shapiro, 1994).
One German high-tech industrialist bluntly summarized the capitalist
world with the statement, "Life is selling" (Orth, 1998).
The often somewhat arbitrary nature of capitalist pay-incentive
awards can cause wasteful frictions, rivalries, jealousies, frustration,
and short-sighted behavior that is counter to both company and societal
interests in the long term (Murphy, 1989). Although the existence of
stock incentive plans in West Germany can theoretically help to enhance
the motivation to work toward a common goal of maximizing the company's
stock price (Diamond and Verrechia, 1982), it is not clear that
maximization of stock price maximizes company value and efficiency.
CHAPTER 4 167
For instance, DeFusco, Johnson, and Zorn ( 1990) have found evidence
that stock option plans only provide an incentive to transfer wealth from
bondholders to stockholders and do not result in any increases in firm
efficiency. In addition, Larcker (1983) has found empirical evidence
that stock incentive plans are no more effective than other long-term
incentive plans in increasing stock prices.
Moreover, because stock prices are not determined by insiders with full
information, stock prices often behave extremely irrationally (Krueger
and Kennedy, 1990), may fluctuate around short-term events and ignore
long-term prospects (e.g., DeBondt and Thaler, 1985, and Jacobs and
Levy, 1988), can deviate greatly from true value for significant periods
of time without detection (Summers, 1986), and can therefore provide
distorted signals for performance purposes (Froot, Scharfstein, and
Stein, 1992). Because such distortions in stock prices exist in Germany
as well as in other countries like the USA (Schiereck, De Bondt, and
Weber, 1999), compensation based on such prices can lead to distorted
performance by employees. Even ifthe common goal of company valu­
ation maximization could be attained, individual company maximization
is often inconsistent with value maximization of a larger whole
(Eiteman, Stonehill, and Moffett, 1998) and is frequently at odds with
the welfare of society (Marx and Engels, 1988a ). For instance, even the
capitalist philosopher Adam Smith stated that profit-maximizing busi­
ness owners are often naturally engaged in a "conspiracy against the
public, or in some contrivance to raise prices" (Strobel and Peterson,
1999).
Regardless of whether employees are paid in stock or cash, it should
�Is� be mentioned that promotions and the highest compensation in cap­
Itahst countries are often allocated to those who are best at playing office
politics as opposed to those who are the most productive (Schwartz,
�990). What club(s) a person belongs to can also factor in as being very
: ��nt in determining pay and employment status (Knight, 1983). �
P llahsm, jobs themselves can take a great deal of time just to find (lf
they can be found at all) and are typically allocated based on physical
�kill and productivity (Los Angeles Times, 1996). 1t isn't what you know
�uty, sales skill, self-promotion, and personal contacts instead of on
ut who you know that often counts most in capitalism (Sesit, 1995).
Although West German capitalism was somewhat more regulated than