Our large companies seem to be largely run by hired managers who work for salaries and who are not owner-entrepreneurs. How then do we get the profit motive into large companies?
To understand how the profit motive can be incorporated into large companies, it's important to consider the various mechanisms and incentives that drive corporate behavior. While the presence of hired managers might create a perception of a diminished profit motive, there are several factors at play that still align the interests of managers and shareholders towards generating profits. Here's an explanation of how the profit motive can be incorporated:
1. Shareholder Capitalism: In most cases, large companies operate based on a system of shareholder capitalism. Shareholders, who own a portion of the company through their investments, have a vested interest in maximizing the company's profits to increase the value of their investments. As a result, managers, who are accountable to the shareholders, have a strong incentive to act in a profit-driven manner and make decisions that enhance the company's financial performance.
2. Financial Incentives: Companies often employ various financial incentives to motivate managers to prioritize profitability. These incentives can include executive compensation packages that directly link managerial remuneration to corporate performance metrics, such as earnings per share, return on investment, or stock price appreciation. By aligning managerial compensation with financial results, companies aim to incentivize managers to focus on profit-driven strategies.
3. Performance Evaluation: Evaluating managerial performance based on financial metrics and key performance indicators (KPIs) provides a framework for measuring and rewarding profitability. Regular performance reviews, target setting, and goal alignment help create a performance-driven culture where managers are continuously striving to improve the company's financial outcomes.
4. Board Oversight: Corporate boards, comprised of independent directors and shareholder representatives, play a crucial role in ensuring the alignment of managerial activities with profitability. Boards monitor the performance of the management team, engage in strategic decision-making, and provide guidance to ensure that the profit motive is upheld in the company's operations.
5. Market Discipline: Large companies operate in competitive markets where they need to generate profits to survive and prosper. A company that consistently fails to produce profits may struggle to attract investors, secure financing, or maintain market share. Market forces, including competition and investor demands, act as external motivators and provide a strong impetus for managers to drive profitability.
Overall, even though large companies may rely on hired managers rather than owner-entrepreneurs, the profit motive remains a significant driving force. Shareholder capitalism, financial incentives, performance evaluation, board oversight, and market discipline collectively contribute to aligning the interests of managers and shareholders towards maximizing profits.