2. Incentives for Executives

The chapter explores why, in the words of one major statistical study, ‘even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time’. CEOs’ base pay is typically closely correlated with company size, independently of performance. Greater size can be achieved rapidly through M&A, boosting salary. In some cases we discuss, senior executives have been awarded significant bonuses just for completing an acquisition deal – even when the deal made shareholders worse off. Most senior executives in the UK and US face performance-related incentives in the form of bonuses or stock options. M&A creates attractive opportunities to game reported performance measures – through financial engineering and creative accounting (analysed in later chapters). Merger can bring greater security for executives. Eliminating competitors can result in a ‘quieter life’. And in the market for corporate control, the threat of being taken over oneself has been shown to diminish as company size increases. M&A also brings more power, perks, publicity, and prestige. The chapter documents each of these incentives for executives to embark on acquisitions even where they bring no improvement in operating profits.